Utah General Contractors - Business and Law Practice Exam

Which of the following methods is acceptable for estimating income when a contract cannot be completed in one taxable year?

1. Cost Accounting Method

2. Completed Contract Method

3. Service Contract Method

4. Direct Cost Method

The correct answer is: Completed Contract Method

The completed contract method is a widely accepted approach for estimating income specifically when a contract spans multiple taxable years. This method allows a contractor to defer income recognition until the contract is completed. This can be particularly beneficial in construction contracts where the duration may extend beyond one year, as it enables businesses to accurately match income with expenses related to that specific contract. Under this method, no income is reported until all work on the contract is finished and the project is delivered. This avoids the complexities and potential inaccuracies of estimating revenue and costs throughout the life of the project, which can be subject to changes and unforeseen expenses. Other methods may not be suitable for multi-year contracts. The cost accounting method focuses on the costs associated with projects rather than income recognition. The service contract method, while related to services over time, does not apply to construction contracts. The direct cost method is often too simplistic to provide a complete picture for estimating income over lengthy projects.