Contract Costs and LTCC Overview
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Questions and Answers

What costs are recognized under a long-term construction contract for the seller creating an asset with no alternative use?

  • Depreciation of idle plant and equipment
  • Costs of materials used in construction
  • Costs of moving plant and equipment to the site (correct)
  • Revenue recognized proportionally to performance obligation satisfied (correct)
  • Which method is NOT a recognized method for the recognition of costs in long-term construction contracts?

  • Cost-to-cost method
  • Efforts expended method
  • Direct measurement of output
  • Incremental cost method (correct)
  • Which criteria must be met for efforts to be recognized as assets?

  • Enhances liability
  • Not recoverable
  • Not exceeding total units
  • Directly related to the contract (correct)
  • What should happen to incremental costs incurred if they are not obtained?

    <p>Expensed immediately</p> Signup and view all the answers

    What method is used when it is not possible to reliably estimate the outcome of a contract?

    <p>Zero Profit Method</p> Signup and view all the answers

    What is the purpose of the Construction in Progress (CIP) account?

    <p>To track incurred costs on projects</p> Signup and view all the answers

    Which of the following costs is categorized as costs to fulfill a contract?

    <p>Site labor costs and supervision</p> Signup and view all the answers

    How is the cost recognized when using the cost-to-cost method?

    <p>Cost incurred to date over total expected costs</p> Signup and view all the answers

    Which of the following could be considered output in the context of long-term construction contracts?

    <p>Milestones achieved</p> Signup and view all the answers

    Under the Zero Profit Method, when is revenue recognized?

    <p>Only to the extent of costs incurred</p> Signup and view all the answers

    What is true about the costs related to the seller creating an asset with no alternative use?

    <p>They can include costs related to satisfied purchase orders.</p> Signup and view all the answers

    Which of the following is an output method in recognizing performance obligations under long-term contracts?

    <p>Direct measurements of value</p> Signup and view all the answers

    What type of standard can efforts expended fall within the scope of?

    <p>Other recognized standards</p> Signup and view all the answers

    What should be added to the cost incurred to date if supplies are not yet used?

    <p>Costs associated with alternative uses</p> Signup and view all the answers

    What should be done with costs of materials not used on any specific contract?

    <p>Expensed immediately</p> Signup and view all the answers

    What is recognized in the Progress Billings account during long-term construction contracts?

    <p>Billings made to clients</p> Signup and view all the answers

    What type of contract is specifically negotiated for the construction of interrelated assets?

    <p>Long-term construction contract</p> Signup and view all the answers

    Which of the following is an example of a fixed price contract?

    <p>Fixed price or fixed rate per output</p> Signup and view all the answers

    What kind of costs are directly related to long-term construction contracts?

    <p>Design and technical assistance costs</p> Signup and view all the answers

    Which of the following is NOT typically included in the costs related to long-term construction contracts?

    <p>Advertising expenses</p> Signup and view all the answers

    What does an escalation clause in a fixed price contract refer to?

    <p>A clause allowing increases based on cost overruns</p> Signup and view all the answers

    What is the amount recorded under Construction in Progress before any billings?

    <p>$500</p> Signup and view all the answers

    What is the total revenue recognized from construction activities?

    <p>$700</p> Signup and view all the answers

    How much is recorded as Progress Billings in the accounts receivable?

    <p>$650</p> Signup and view all the answers

    What amount represents the Contract Asset in the Balance Sheet?

    <p>$50</p> Signup and view all the answers

    What is the amount recorded as Construction Expenses?

    <p>$500</p> Signup and view all the answers

    What is the amount recorded under Progress Billings in the Current Liability section?

    <p>$760</p> Signup and view all the answers

    What is the amount that needs to be deducted from Construction in Progress for the Contract Liability?

    <p>$700</p> Signup and view all the answers

    How is gross profit recognized in the Construction in Progress account?

    <p>By subtracting expenses from revenue</p> Signup and view all the answers

    Which of the following amounts is NOT listed in the balance sheet?

    <p>Cash</p> Signup and view all the answers

    What is the net amount of the Contract Liability after accounting for Progress Billings?

    <p>$60</p> Signup and view all the answers

    Revenue is recognized over time if which criterion is met?

    <p>The customer consumes the benefit of the seller's work as it is performed.</p> Signup and view all the answers

    What is included in general costs attributable to a contract?

    <p>Insurance premiums for the construction site.</p> Signup and view all the answers

    Which of the following is NOT a condition for recognizing revenue over time?

    <p>The seller implements a full refund policy.</p> Signup and view all the answers

    Which of the following represents an increase in costs associated with a contract?

    <p>Agreed variation for additional work.</p> Signup and view all the answers

    Which costs would typically be chargeable to the customer under contract terms?

    <p>Research and development costs, if reimbursable.</p> Signup and view all the answers

    Study Notes

    Contract Costs

    • Contracts to create assets without alternative use are reimbursable under specific conditions.
    • Site labor costs and material usage in construction are key components of contract costs.
    • Depreciation applies to idle equipment and any plant or equipment not tied to a specific contract.
    • Costs incurred for moving equipment and materials to and from job sites are also included.

    Long-Term Construction Contracts (LTCC)

    • Incremental costs should be capitalized when obtaining contracts unless they are expensed.
    • Costs directly related to fulfilling a contract may be recognized as assets if certain conditions are met.
    • Criteria for asset recognition include being directly related to the contract, enhancing the asset, and being recoverable.

    Recognition Methods

    • Revenue from LTCC can be recognized using either input or output methods, depending on the contract specifics.
    • Input methods include cost-to-cost and efforts expended (evaluating labor hours and materials used).
    • Output methods are based on direct measurements of value transferred, such as milestones or units produced.
    • Recognizing revenue at the point in time may apply when reliable outcome estimation of the contract isn't possible.

    Journal Entries in LTCC

    • Key accounts used in journal entries include Construction in Progress (CIP), Progress Billings, and Contract Account.
    • Typical entries include recording incurred costs, recognizing gross profit in the CIP account, and billing customers for progress.

    Types of Construction Contracts

    • Fixed-price contracts provide a set price per output and include potential escalation clauses for cost increases.
    • Cost-plus contracts allow for fees in addition to direct costs (both variable and fixed).
    • Design and technical assistance costs associated with contracts may involve rectification estimates and warranty costs.

    Contract Revenues

    • Contract revenues include the total consideration receivable and adjustments for variations and cost escalations.
    • Revenue recognition occurs over time if specific criteria are met, such as customer consumption of benefits and control over assets being created.
    • General overhead and administrative costs may be chargeable under contract terms if reimbursable.

    General Costs and Considerations

    • Costs related to insurance and other general administration may need to be clarified in contract terms to determine reimbursement.
    • Research and development costs can be included if specifically reimbursable under the contract provisions.

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    Description

    This quiz covers key concepts related to contract costs and long-term construction contracts (LTCC). It includes details on cost recognition, capitalization, and the criteria for asset recognition. Test your understanding of these essential principles in construction management.

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