Village Company is accounting for a long-term construction contract using the percentage of- completion method. It is a three-year, fixed-fee contract that is presently in its first year. The latest reasonable estimates of total contract costs indicate that the contract will be completed at a profit. Village will submit progress billings to the customer and has reasonable assurance that collections on these billings will be received in each year of the contract.
Required
1. a. What is the justification for the percentage-of completion method for long-term construction contracts?
b. What facts in the preceding situation indicate that Village should account for this long-term construction contract using the percentage-of-completion method?
2. How would the income recognized in each year of this long-term construction contract be determined using the cost-to-cost method of determining percentage of completion?
3. What is the effect on income, if any, of the progress billings and the collections on these billings?