Completed contract method
Recognizes income only on completion (or substantial completion) of the contract
When is it acceptable to use the completed contract method?
- When it is difficult to estimate the costs of a contracts in progress
- When there are many contracts in progress so that about an equal number are completed in each year and an unequal recognition of income does not result
- When the projects are of short duration, and collections are not assured
Under completed contract, how should the excess of accumulated costs over related billings be reflected in the BS?
Current asset
Under completed contract, how should the excess of accumulated billings over related costs be reflected in the BS?
Current liability
Current asset accounts under completed contract
- Due on accounts (receivable)
2. Cost of uncompleted contracts in excess of progress billings (construction in progress => like inventory)
Current liability account under completed contract
Progress billings on uncompleted contracts in excess of cost (i.e. excess billings, retainer or deposit)
What should applicable overhead and directs costs be charged to under completed contract?
Construction in progress account (asset)
What should billings and/or cash received be credited to?
Advances on construction in progress account (liability)
At completion of a contract, how is gross profit/loss calculated?
Contract price - Total costs = Gross profit/loss
How is an expected loss on the total contract (completed contract) determined?
By:
- Adding estimated costs to complete to the recorded costs to date to = total contract costs
- Adding to advances any additional revenue expected to = total contract revenue
- Total contract costs - Total contract revenue = Total estimate loss on contract
What method must be used under IFRS?
Percentage-of-completion method unless final outcome cannot be reliably estimated (then cost recovery method required)
When is it appropriate to use percentage-of-completion method?
When collection is assured and the entity’s acct system can:
- Reasonably estimate profitability; and
- Provide a reliable measure of progress toward completion
Under the percentage-of-completion method, how is recognition of revenue determined?
Income recognized = percentage of estimated total income either:
- That incurred costs to date bear to total estimated costs based on the most recent cost info, or
- That may be indicated by such other measure of progress toward completion
Current asset accounts under percentage-of-completion
- Due on accounts (receivable)
2. Costs and estimated earnings of uncompleted contracts in excess of progress billings (construction in progress)
Current liability account under percentage-of-completion
Progress billings in excess of cost and estimated earnings on uncompleted contracts
How should “progress billings” and “construction in progress” accounts be reported?
Net of their related contra accounts
Under percentage-of-completion method, how is gross profit recognized?
- Compute gross profit of completed contract
- Compute % of completion
- Compute gross profit earned (profit to date)
- Compute gross profit earned for current year
Under percentage-of-completion method, when is an estimated loss on the total contract recognized?
Immediately in the year it is discovered
Under the completed contract method, when is revenue recognized?
When the job is complete
Formula for calculated annual gross profit under percentage-of-completion
[Total cost incurred/Total expected cost] x [Total expected gross profit] - Total gross profit previously recognized
What ratio is included in the calculation of income recognized under percentage-of-completion method?
Total costs incurred to date / Total estimated cost of contract
Under percentage-of-completion method, when calculating net current asset/net current liability, do you use current or cumulative figures?
Cumulative
