Chang Constructions entered into a fixed-price contract withTravels Hotels on 1 Jan 1993 to construct a 4-storey hotelbuilding. Chang estimated that it would take 3 years to completethe project. The total contract price for construction of the hotelis $2,100,000. Actual contract cost incurred, estimated costs tocomplete the contract & the amount billed to Travels Hotels forportions of the contract price for the first 2 years of operationswere as follows:
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Estimated Costs to Complete as of:
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Actual Contract CostIncurred
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Amount billed to TravelsHotel
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31-Dec-93
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$600,000
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$1,200,000
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$1,000,000
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31-Dec-94
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700,000
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400,000
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300,000
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Ignoring taxes, what are the amount for (a) Gross Profit orloss on contract, (b) Contracts in Process Less Progress Billings,that Chang Constructions would report in its financial statementsfor the years ended 31 Dec 1993 & 1994 under: 1. The percentage of completion method, assuming Chang basesthe degree of completion on the percentage of total costs incurredto date
2. The completed contract method.
(a) What is the basic assumption underlying the percentage of completion (POC) revenue recognition method of accounting for long term construction contracts?
(b) What are some (normative) arguments that have been given by academics & accounting policy makers in support of the POC method?