Let’s Spread Our Losses, Too!
The Abbott Construction Company has several contracts to build sections of freeways, bridges, and dams. Because most of these contracts require more than one year to complete, the accountant, Dave Allred, has recommended use of the percentage of completion method to recognize revenue and income on these contracts. The president, Kathy Bahr, isn’t quite sure how the accounting method works, and she indicates concern about the impact of this decision on income taxes. Bahr also inquires as to what happens when a contract results in a loss. When told by Allred that any estimated loss must be recognized when it is first identified, Bahr becomes upset. “If it is a percentage of completion method and we are recognizing profits in part as we go along, why shouldn’t we be able to do the same for losses?” How would you, as the accountant, answer Bahr’s concerns?