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 Cost Incurred
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Amount billed to Travels Hotel
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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 or losson contract, (b) Contracts in Process Less Progress Billings, thatChang Constructions would report in its financial statements forthe years ended 31 Dec 1993 & 1994 under
1. The percentage of completion method, assuming Chang bases thedegree of completion on the percentage of total costs incurred todate
2. The completed contract method.
(b) What is the basic assumption underlying the percentage ofcompletion (POC) revenue recognition method of accounting for longterm construction contracts?
(c) What are some (normative) arguments that have been given byacademics & accounting policy makers in support of the POC method?