When is a loss recognized on a long-term contract under the percentage-of-completion method?

• A. When the contract is at least 50% complete
• B. When the customer makes the final payment
• C. Only at the completion of the contract
• D. As soon as it is probable that the contract will result in a loss, regardless of the stage of completion

Answer: (D)

Verified step by step guidance

1. Understand the percentage-of-completion method: This accounting method recognizes revenue and expenses proportionally as the work on a long-term contract progresses. It is based on the percentage of the contract completed during a specific period.
2. Recognize the principle of loss recognition: Under the percentage-of-completion method, losses are recognized as soon as it is probable that the contract will result in a loss, regardless of the stage of completion. This ensures that financial statements reflect the economic reality of the contract.
3. Analyze the contract's projected costs and revenues: Compare the total estimated costs to the total estimated revenues. If the costs exceed the revenues, it indicates a probable loss.
4. Determine the timing of loss recognition: Unlike revenue recognition, which is based on the percentage of completion, losses are recognized immediately when they are probable, regardless of whether the contract is 10%, 50%, or 90% complete.
5. Apply the accounting treatment: Record the loss in the financial statements by debiting the loss account and crediting the contract-related accounts (e.g., construction in progress or accrued liabilities) to reflect the anticipated loss.