Question

Two accounting students were discussing the timing of revenue recognition for long-term construction contracts. The discussion focused on which method was most like the typical revenue recognition method of recognizing revenue at the point of product delivery. Bill argued that recognizing revenue upon project completion was preferable because it was analogous to recognizing revenue at the point of delivery. John disagreed and supported recognizing revenue over time, stating that it was analogous to accruing revenue as a performance obligation was satisfied. John also pointed out that an advantage of recognizing revenue over time is that it provides information sooner to users. Discuss the arguments made by both students. Which argument do you support? Why?

Answer 1

ANSWER: If the outcome of a construction contract can. be estimated reliably, revenue and cost should Decognised in proportion to the stage Completion of contract Activity. This is known as the percentage of completion method of accounting In the argue ment Bill is incorrect to recognize revenue on project completion or percentage at should be recogizing Over the time on the basis of percentage of complction method. How ever following disclosure should also be made • amount of contract revenue recognized o method used to determine revenue. Stage & method to used determine of completion * * *