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.
(a) What theoretical justification is there for Widjaja Company’s use of the percentage of completion method?
(b) How would progress billings be accounted for? Include in your discussion the classification of progress billings in Widjaja Company financial statements.
(c) How would the income recognized in the second year of the 4 year contract be determined using the cost to cost method of determining percentage of completion?
(d) What would be the effect on earnings per share in the second year of the 4 year contract of using the percentage of completion method instead of the completed contract method? Discuss.
(AICPA adapted)
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