Smith Professional Builders and Johnston Construction are identical construction companies except for their revenue recognition methods. Smith uses the percentage-of-completion method while Johnston uses the completed contract method. Which of the following best describes the financial statements prior to the completion of a similar project? A. Johnston would have lower total assets than Smith. B. Smith would have higher liabilities than Johnston. C. Smith would have the same stockholder equity as Johnston. D. Johnston would have higher stockholder equity than Smith. the ans: A ----------------- why in percentage-of-completion have higher TA? the TA should be the same for percentage of completion and completed right since both method having the same expense(pay contractor) or income(from billing)
Wouldn’t they have an asset account created to recognize the percentage completed and a liability account for any advance billings? If that’s the case, the POC method would obviously generate a higher asset because they are allowed to recognize an asset earlier than the CC method. I could be wrong though.
with POC method you get to recognize revenue gradually as you are completing your contract, whereas with CC, you cannot recognize the revenue until you complete the contract. my guess is TA would be same for both company AFTER the project is fully completed, but before that, the company using POC method will have higher TA.
If i’m not wrong for CC, the progress cost is an asset of company and the money received from customer is a liability of company. wouldn’t the TA was increased? by the way anyone here can enlighten me for this>> for CC method, if the cost is 50 and the progress payment from customer is 70, where should we put the difference(20) for cost(50) and income(70)
As Smith is recognising revenue in a phased manner, he is also accounting for the consumption of stocks and inventories used for the project…whereas Johnston does this only when the contract is complete. Thus johnston shows reduced assets in his books of accounts.