Under the percentage-of-completion method, how is revenue recognized for a long-term construction contract and what is the common progress measure?

• A. Revenue recognized over time as work progresses, using percentage of completion; the common measure is costs incurred to date divided by estimated total costs.
• B. Revenue recognized at completion; progress measured by milestones.
• C. Revenue recognized when billings are issued; progress measured by billings to date.
• D. Revenue recognized based on cash received; progress measured by cash disbursements.

Answer: (A)

The main idea is that for long-term construction contracts, revenue is recognized as work is performed, not only when the project ends. This approach, the percentage-of-completion method, aligns revenue with the ongoing effort and costs incurred, so the financial statements reflect progress through the contract.

The common way to measure progress is the cost-to-cost method: take costs incurred to date and divide by the estimated total costs to complete the project. This proportion represents how much of the contract's work has been completed. Multiply that percentage by the total expected contract revenue to determine how much revenue to recognize so far, and allocate the corresponding gross profit in that period. If estimates change, the recognized revenue and gross profit are adjusted to reflect the updated degree of completion, keeping the revenue recognition tied to actual progress.

Why the other approaches don’t fit: recognizing revenue only at completion delays earnings recognition and distorts timing for long-running projects; recognizing revenue when billings are issued or based on cash receipts ignores the actual performance progress and can misstate both revenue and costs incurred during the contract period.