Question

WRITING (Long-Term Contract—Percentage-of-Completion) Widjaja Company is accounting for a long-term construction contract using the percentage-of-completion method. It is a 4-year contract that is currently in its second year. The latest estimates of total contract costs indicate that the contract will be completed at a profit to Widjaja Company.

Instructions

(a) What theoretical justification is there for Widjaja Company’s use of the percentage-of-completion method?

Short answer

The business entity can use the percentage of completion method for recognizing revenue becausethe business entity is qualified for reporting revenue over a period of time.

Step-by-step solution

Definition of Long-Term Contract

A contract that does not end in one fiscal period or a contract that goes on for more than one year is known as a long-term contract.

Justification for the use ofthe percentage of completion method

The company is accounting for a long-term contract that will continue for four years, and also, the company qualifies for reporting revenue over time. Therefore, the company can use the percentage of completion method for recognizing revenue.