The principal disadvantage of using the percentage of completion method of recognizing revenue from long-term contracts is that it
A) Is unacceptable for income tax purposes
B) May require that intraperiod tax allocation procedures be used
C) Gives results bases upon estimates that may be subject to considerable uncertainty
D) Is likely to assign a small amount of revenue to a period during which much revenue was actually earned

Question

Quizplus · Accepted Answer

The percentage of completion method requires estimates to be made regarding the costs and progress of the project, which can be subject to considerable uncertainty. This can result in inaccurate recognition of revenue, which is the main disadvantage of this method. Option A and B are incorrect as the percentage of completion method is acceptable for income tax purposes and does not necessarily require intraperiod tax allocation. Option D is also incorrect as the percentage of completion method is designed to recognize revenue in proportion to the actual progress made on the project, so a small amount of revenue would not be assigned to a period during which much revenue was actually earned.

The Principal Disadvantage of Using the Percentage of Completion Method