Under the earnings approach, how should the balances of progress billings and construction in process be shown at reporting dates prior to the completion of a long-term contract?
A)Progress billings as deferred income, construction in progress as a deferred expense.
B)Progress billings as income, construction in process as inventory.
C)Net, as a current asset if debit balance and current liability if credit balance.
D)Net, as income from construction if credit balance, and loss from construction if debit balance.

Question

Quizplus · Accepted Answer

Under the earnings approach, progress billings and construction in process should be netted and shown as a current asset if there is a debit balance, or a current liability if there is a credit balance. This is because progress billings represent amounts billed to the customer in excess of the revenue recognized, while construction in process represents costs incurred to date on the project. Netting these two accounts shows the balance that has yet to be recognized as revenue, or the amount that may need to be refunded to the client if costs exceed the contract amount. Option A is incorrect because progress billings and construction in process should not be deferred income or expense, as they do not represent revenue or expenses yet to be earned/incurred. Option B is incorrect because progress billings should not be recognized as income until the revenue is earned, while construction in process should not be classified as inventory as it is not held for sale in the ordinary course of business. Option D is incorrect because progress billings and construction in process should be netted, not reported as separate income/expense accounts, and the classification of income/loss should not be based on the debit or credit balance.

Under the Earnings Approach, How Should the Balances of Progress