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17 Cards in this Set
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- Back
- 3rd side (hint)
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Completed Contract Method
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U.S. GAAP only, recognized income only on completion (or substantial completion*) of a contract.
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*A contract is regarded as substantially complete if the remaining costs are insignificant.
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Completed Contract Method- Requirements (3)
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1. It is difficult to estimate the costs of a contract in progress.
2. 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. 3. The projects are of short duration, and collections are not assured. |
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Completed Contract Method- Balance Sheet Presentation
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-The excess of accumulated costs over related billings should be reflected in the B/S as a current asset.
-The excess of accumulated billings over related costs should be reflected as a current liability. -In the case of more than one contract, the accumulated costs/liabilities should be separately stated. -The preferred terminology for the B/S presentation should be "Costs (billings) of uncompleted contracts in excess of related billings (costs)."* |
*"Progress billings" and "contruction in progress" are merely different accounts representing the same contract asset and should be shown net of their related contra accounts.
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Completed Contract Method- B/S Current Assets & Liabilities
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-Current Asset Accounts
1. Due on accounts (receivable) 2. Costs of uncompleted contracts in excess of progress billings (sometimes called "construction in progress")* *Like inventory |
-Current Liability Account
1. Progress billings on uncompleted contracts in excess of cost.* *Ex's: excess billings, an advanced retainer or deposit |
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Accounting for the Completed Contract Method
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1. Applicable overhead and direct costs should be charged to a construction in progress account (an asset).*
2. Billings and/or cash received should be credited to advances on contruction in progress account (a liability)* 3. At completion of the contract: Contract Price - Total Costs = Gross Profit/Loss 4. At interim B/S dates, the excess of either the construction in progress account or the advances account over the other is classified as a current asset or a current liability.** 5. Losses should be recognized in full in the year they are discovered.*** |
*The net of #1 & #2 is the current asset/liability
**Classified as current b/c of the current operating cycle concept ***An expected loss on the total contract is determined by: 1. Adding estimated costs to complete the recorded costs to date to arrive at total contract costs 2. Adding to advances any additional revenue expected to arrive at total contract revenue 3. Subtracting #2 from #1 to arrive at total estimated loss on contract |
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Completed Contract Method- Advantages/Disadvantages
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1. Primary advantage is that it is based on final results rather than estimates.
2. Primary disadvantage is that it does not properly reflect the matching principle when the period of contract extends over more than one accounting period. |
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IFRS vs. U.S. GAAP- Completed Contract Method
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-The completed contract method is not permitted under IFRS. The percentage of completion method must be used unless the final outcome of the project cannot be reliably estimated, in which case the cost recovery method is required.*
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*Under the cost recovery method, revenue can only be recognized to the extent that cash collected exceeds the costs incurred.
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Percentage of Completion Method- Requirements
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-Appropriate to use (under IFRS and GAAP) when collection is assured and the entity's accounting system can: (1) Reasonably estimate profitability and (2) Provide a reliable measure of progress towards completion.
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Percentage of Completion Method- Revenue Recognition
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-Revenue must be earned before it is recognized. Generally recognized when:
1. The earnings process is complete or virtually complete 2. An exchange has taken place -Recognizes income as work progresses on the contract* |
*Accounting for long-term construction contracts under this method is an exception to the basic realization principle. Consensus is that a better measure of periodic income results (principle of matching revenues and costs).
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Percentage of Completion Method- Determination of Revenue Recognized
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-Income recognized is the percentage of estimated total income either:
1. That incurred costs to date bear to total estimated costs based on the most recent information*, or 2. That may be indicated by such other measure of progress toward completion appropriate to the work performed. |
*(Costs Incurred ÷ Total Expected Cost) =
(Work Incurred ÷ Total Expected Work) = % of Job "Earned" |
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Percentage of Completion Method- Material and Subcontract Costs
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-During the early stages of a contract, all or a portion of items such as material not used and subcontract costs may be excluded in determining the percentage of completion if it appears that the exclusion would produce a more meaningful allocation of periodic income.
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Percentage of Completion Method- Losses
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-A provision for the loss on the entire contract should be made when current estimates of the total contract costs indicate a loss*
1. However, when a loss is indicated on a total contact that is part of a related group of contracts, the group may be treated as a unit in determining the necessity of providing for losses. |
2. Income to be recognized under the percentage of completion method at various stages should not ordinarily measured by interim billings.
*Rule of Conservatism |
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Percentage of Completion Method- Balance Sheet Presentation
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-Current Asset Accounts
1. Due on accounts (receivable) 2. Costs and estimated earnings of uncompleted contracts in excess of progress billings (sometimes called "construction in progress") |
-Current Liability Account
1. Progress billings in excess of cost and estimated earnings on uncompleted contracts. |
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Percentage of Completion Method- Advantages & Disadvantages
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1. Advantages: (1) accurate reporting of the status of uncompleted contracts and (2) the periodic recognition of income currently (rather than irregularly) as contracts are completed.
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2. Principle Disadvantage: the necessity of relying on estimates of the ultimate costs.
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Accounting for the Percentage of Completion Method
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1. Journal entries and interim B/S treatment are the same as the completed contract method except that the amount of estimated gross profit earned in each period is recorded by charging the construction in progress account and crediting realized gross profit.
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2. An estimated loss on the total contract is recognized immediately in the year it is discovered. However, any previous gross profit or loss reported in prior years must be adjusted for when calculating the total estimated loss.
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Percentage of Completion Method- Gross Profit/Loss Steps
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1. Compute gross profit of completed contract.
2. Compute the "% of completion" 3. Compute gross profit earned (profit to date) 4. Compute gross profit earned for current year. |
1. Contract Price - (Estimated Total Cost) = Gross Profit
2. Total Cost to Date ÷ Total Estimated Cost of Contract 3. = Step #1 x Step #2 4. = Profit to Date at Current FV Estimate - (PTD at Beginning of Period) |
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Percentage of Completion Method- Other Considerations
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1. Change in Method: (for long-term, construction-type contracts) is treated as a change in accounting principle. Changes are reported retrospectively.
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2. Disclosure: generally require no special disclosure b/c they are the nature of the contractor's business. However, unusual extraordinary commitments should be fully disclosed in the F/S's or footnotes thereto.
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