Question

CA18-9 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

How would progress billings be accounted for? Include in your discussion the classification of progress billings in Widjaja Company financial statements.

Short answer

Answer

The business entity will use the accounts receivables and progress billing account to account for progress billing. Progress billing will be reported as a current asset or current liability depending on the amount reported in billing on construction and construction in process accounts.

Step-by-step solution

Definition of Progress Billing

The billing made under the long-term contract that requests the payment in respect of the work completed to date is known as progress billing.

Accounting for Progress Billings

The business entity will account for progress billing by Debiting the accounts receivables and crediting progress billing on the contract. Progress billing is a contra-asset account that is used to offset against the construction in process. When the amount reported in the construction in process account is higher than billing on the construction in process account, both will be reported as the net value in the current assets section.

Suppose the amount reported in the billing on construction in the process account is higher than the construction in the process account. In that case, both of them will be reported on the balance sheet as current liabilities on their net value.