What is the formula for recognizing gain/loss on long-term construction-type contracts under the percentage-of-completion method?

The correct formula for recognizing gain or loss on long-term construction-type contracts under the percentage-of-completion method is based on the progress made on the contract in relation to the total estimated costs. The second choice accurately captures this concept, emphasizing the need to compare costs incurred to date against total estimated costs.

When applying the percentage-of-completion method, the calculation starts with determining the percentage of the contract that is complete, which is derived by dividing the total costs incurred to date by the total estimated costs of the contract. This percentage helps in allocating the total estimated gross profit across the life of the contract. Once the total estimated gross profit is calculated, the profit that has been recognized up to that date is subtracted to get the profit to be recognized in the current period.

This approach ensures that income is recognized progressively as work is completed, reflecting the ongoing nature of long-term contracts. It aligns revenue recognition with the actual work performed and costs incurred, providing a more accurate financial picture over the life of the project.

Other options do not correctly capture the essential elements of the percentage-of-completion method. For instance, the first option inaccurately suggests a formula involved with gross profit without considering the essential elements of cost estimation and completion percentage. Similarly, the third