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

question 3

Multiple Choice

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 used.
• B) recognized in the current period under the percentage-of-completion method, but the completed-contract method should defer 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 should defer 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 used.

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Definitions:

Substitution Effect

The economic understanding that as prices rise or income decreases, consumers will replace more expensive items with cheaper alternatives.

Price of Capital

The cost of using capital assets, which can include interest rates on loans used to purchase the assets or opportunity costs of investing capital elsewhere.

Demand for Labor

The total amount of labor that employers want to hire at varying wage rates in a given time period.

Related Resource

Resources that are connected or relevant to one another in such a way that the presence, absence, or alteration of one can affect the other.