Question

Which of the following is least likely to be a reason why a long-term construction contract would qualify for revenue recognition over time?

Multiple Choice

• The customer controls the asset as it is created.

• The seller is creating an asset that has no alternative use to the seller, and the seller has the legal right to receive payment for progress to date.

• The seller is constructing an addition to property that is owned by the customer.

• The customer consumes the benefit of the seller's work as it is performed.

When using the cost recovery method of accounting for long-term construction contracts under IFRS:

Multiple Choice

• Estimated losses on the overall contract are recognized before the contract is completed.

• Companies can use the percentage-of-completion method if that is their preference.

• Expenses are recorded each period, but revenue is only recognized when the contract is completed.

• Neither gains nor losses are recognized until the contract is completed.

Under the realization principle, revenue should not be recognized until the earnings process is deemed virtually complete and:

Multiple Choice

• Collection is reasonably certain.

• Revenue is realized.

• Collection is absolutely assured.

• Any receivable is collected.

Summary data for Benedict Construction Co.'s (BCC) Job 1227, which was completed in 2021, are presented below:

Bid price		$	450,000
Contract cost:	2020		(180,000	)
	2021		(195,000	)
Gross profit:			75,000

Estimated cost to complete:

12/31/2020	$	200,000
12/31/2021		0

Assuming BCC recognizes revenue upon project completion, what would gross profit have been in 2020 and 2021 (rounded to the nearest thousand)?

	2020			2021
a.	$	36,000		$	39,000
b.	$	30,000		$	45,000
c.	$	70,000		$	5,000
d.	$	0		$	75,000

Multiple Choice

• option b

• option d

• option a

• option c

Which of the following is a characteristic of a contract for purposes of revenue recognition?

Multiple Choice

• Commercial substance.

• Nonverbal.

• Notarized within the company's state of incorporation.

• Reasonable profit margin.

Answer 1

1. Revenue Recognition over a period of time for a long Term construction Contract:

All the Four options given for this question are the criteria why a revenue is recognized over a period of time. When it comes to Long term construction contract one option which is least likely to be the reason is Option D - That the customer consumes the benefit of the sellers work as it is performed. Because incase of construction the customer cannot consume the benfit (i.e) use the building untill it is fully completed.

All other options are perfectly suitable for the long term construction contract.

Option A - Yes, The customer controls the asset as it is created. The builder has only temporary right to make construction on the site but the ownership is with the customer and he has the right to control the asset.

Option B - Yes, The Seller has no alternate use to the building he creates and he has legal obligation to receive the payment. The Seller (i.e) the buyer builds the building on the site of the customer according to his requirements and he cannot sell the building alone or use it.

Option D - Yes, The seller is creating an addition to the property that is owned by the buyer. The builder is creating addition to the site already owned by the customer.