Question

How should earned but unbilled revenues at the balance sheet date on a long-term construction contract be disclosed if the percentage-of-completion method of revenue recognition is used?

a. As construction in process in the current asset section of the balance sheet.
b. As construction in process in the noncurrent asset section of the balance sheet.
c. As a receivable in the noncurrent asset section of the balance sheet.
d. In a note to the financial statements until the customer is formally billed for the portion of work completed.

Answer 1

If the percentage-of-completion method of revenue recognition is used, earned but unbilled revenues should be disclosed as a receivable in the noncurrent asset section of the balance sheet.

Step-by-step explanation:

If the percentage-of-completion method of revenue recognition is used, earned but unbilled revenues at the balance sheet date on a long-term construction contract should be disclosed as a receivable in the noncurrent asset section of the balance sheet.

This is because the percentage-of-completion method recognizes revenue based on the percentage of work completed, even if the customer has not been formally billed for that portion of work. Therefore, the revenue is considered earned and should be recorded as a receivable.

Disclosing the earned but unbilled revenues as a receivable provides a clear indication of the company's entitlement to payment for the work completed.