Cost estimates on a long-term contract may indicate that a loss will result on completion of the entire contract. In this case, the entire expected loss should be
A) recognized in the current period, regardless of whether the percentage-of-completion or completed-contract method is employed.
B) recognized in the current period under the percentage-of-completion method, but the completed-contract method defers recognition of the loss to the time when the contract is completed.
C) recognized in the current period under the completed-contract method, but the percentage-of-completion method defers the loss until the contract is completed.
D) deferred and recognized when the contract is completed, regardless of whether the percentage-of-completion or completed-contract method is employed.

Question

Quizplus · Accepted Answer

If the cost estimates indicate that a loss will result on completion of the entire contract, the entire expected loss should be recognized in the current period, regardless of whether the percentage-of-completion or completed-contract method is employed. This is because the principles of conservatism and matching require that a loss should be recognized as soon as it is anticipated, rather than waiting for completion of the contract. Therefore, option A is the best choice. The other options either defer recognition of the loss to some future period (options B and C) or assume that the loss should not be recognized until completion of the contract (option D), which is not consistent with generally accepted accounting principles.

Cost Estimates on a Long-Term Contract May Indicate That a Loss