Q: A company has incurred $$2$$ million in costs on a contract with a total budgeted cost of $$8$$ million and a total contract value of $$10$$ million. What is the revenue to be recognized to date using the percentage-of-completion method?

$$\frac{2}{8} \times 10 = 2.5$$ million

Question 1

Which of the following best describes the matching principle in financial accounting?

Accepted Answer

Expenses are recognized in the same period as the revenues they help to generate.

Question 2

A construction company is working on a contract with a total value of $$12$$ million. By the end of the year, it has incurred $$3$$ million in costs, and the total estimated cost to complete the project is $$9$$ million. Using the percentage-of-completion method, what is the percentage of completion?

Accepted Answer

$$\frac{3}{9} = 33.3\% ($$correct denominator is total estimated cost, which is $$9$$ million)

Question 3

Which accounts are closed at the end of the accounting period?

Accepted Answer

Income, expenses, and dividends

Question 4

Under the percentage-of-completion method, how is revenue recognized for a long-term construction contract?

Accepted Answer

Revenue is recognized based on the proportion of work completed during the period.

Question 5

If a construction contract is expected to result in a loss, when should the loss be recognized under the percentage-of-completion method?

Accepted Answer

Immediately, in full, as soon as the loss is anticipated.

Question 6

A company has incurred $$2$$ million in costs on a contract with a total budgeted cost of $$8$$ million and a total contract value of $$10$$ million. What is the revenue to be recognized to date using the percentage-of-completion method?

Accepted Answer

$$\frac{2}{8} 	imes 10 = 2.5$$ million

Question 7

Which of the following is NOT a step in closing the books at the end of the period?

Accepted Answer

Credit all asset accounts for their balances.

Question 8

If the stage of completion cannot be reliably measured for a long-term contract, which revenue recognition method should be used?

Accepted Answer

Sales method (recognize revenue at delivery)

Question 9

Which of the following best describes the adjusted trial balance?

Accepted Answer

A list of all accounts and their balances after adjusting entries are posted.

Question 10

A company revises its budgeted costs for a contract from $$7.5$$ million to $$11$$ million due to unexpected costs. By the balance sheet date, $$3.4$$ million has been incurred. What is the percentage of completion?

Accepted Answer

$$\frac{3.4}{11} = 30.9\%$$

Question 11

Which of the following statements about the accruals principle is correct?

Accepted Answer

Revenue and expenses are recognized when they are earned or incurred, regardless of cash flow.

Question 12

In the context of closing entries, what is the effect of crediting the Dividends account?

Accepted Answer

It decreases retained earnings.

Question 13

Which of the following is a permanent account that is NOT closed at the end of the period?

Accepted Answer

Retained Earnings

Question 14

A company receives progress billings (payments) during a construction contract. According to the percentage-of-completion method, how should these payments be treated?

Accepted Answer

Offset against the asset item 'ongoing work in progress' on the balance sheet.

Question 15

Which of the following is true regarding losses on long-term construction contracts under the percentage-of-completion method?

Accepted Answer

Losses are recognized in full immediately when anticipated.

Question 16

If a company cannot reliably estimate the stage of completion for a software development contract, what is the correct accounting treatment for expenses before delivery?

Accepted Answer

Expenses are capitalized as 'work in progress' until delivery.

Question 17

Which of the following formulas is used to calculate the percentage of completion (POC) for a construction contract?

Accepted Answer

$$	ext{POC} = \frac{	ext{Expenses incurred up to date}}{	ext{Budgeted total costs}}$$

Question 18

Which of the following best describes the main purpose of preparing an adjusted trial balance?

Accepted Answer

To verify that total debits equal total credits after adjusting entries.

Accrual Accounting and the Percentage-of-Completion Method in Financial Accounting

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