Question

For what reasons should the percentage-of-completion method be used over the completed-contract method whenever possible?

Short answer

The percentage-of-completion method is used to calculate income, representing the production effort more accurately. Income is recognized regularly depending on the proportion of the project completed, rather than simply when the entire assignment is completed.

Step-by-step solution

Meaning of Percentage-of-Completion

The percentage-of-completion method tracksrevenues, expenditures, and gross profit as a company nears the end of a long-term contract. Deferring recognition of these items till the conclusion of the contract distorts the accounting periods' efforts (costs) and accomplishments (revenues).

A corporation must have some foundation or standard for gauging progress toward completion at specific intermediate dates to use the percentage-of-complete technique.

Use of percentage-of-completion

Income is provided using the percentage-of-completion technique, which reflects the manufacturing effort more properly. Rather than only when the full task is finished, income is recognized regularly based on the proportion of the job accomplished. The main problem of the completed-contract technique is that it may cause earnings to be distorted since no attempt is made to represent current performance when the contract duration spans many accounting periods.