Question

Two first year accounting associates are discussing the timing of revenue recognition for long-term construction contracts, and more specifically, discussing which method best reflects the point-of-sale/delivery. One associate, Taylor, believes recognizing revenue at the time of completion is the preferred method and most like point-of-sale/delivery revenue recognition.

The other associate, Alex, believes recognizing the revenue over time is the preferred method because revenue is recognized as time progresses (as portions of the contract are completed), and the revenue can be reported sooner.

Do you agree with Taylor or with Alex? Explain why you agree with that associate.

Answer 1

In a long-term construction contract normally use the percentage of completion method as the preferred method under U. S. GAAP. In this method, revenue is recognized periodically as the certain percentage of completion complete and contractor billed accordingly in the lifespan of the long-term contract. In this method cost incurred and revenue earned is based on the percentage factor to the total revenue and cost receptively. which help the contractor to record the revenue and expenses accordingly in multiple tax period and book reasonable accurate income and taxed accordingly.

while in some other methods contractor can record the revenue on completion of the contract. which is used in rare circumstances where all revenue is recognized at the end of the contract. this is mostly used in the short lifespan of the contract where the lifespan of the contract is not more than 24 months so that the end result is not much different than the POC method.

Hence we agree with the Alex in this case to recognizes the revenue over time upon the proportions of the contract are completed(POC method) instead of Taylor. Because it is the best and most preferred method of revenue recognition method for a long-term construction contract.