F1M4 Long Term Construction Contracts

Question 1

Percentage of Completion (Requirements)

Answer 1

Percentage method records Gross Profits over time which requires reasonable estimates of profits and reliable measures of progress.

(usually, cost percentage is the estimate unless another measure is more appropriate)

Question 2

Percentage of Completion (Calculation)

Answer 2

1. Gross Profit (Contract Price - Total Estimated Costs)
2. Percentage Completed (Cost Incurred / Total Estimated Costs)
3. Gross Profit ITD (Gross Profit x Percentage Completed)
4. Gross Profit YTD (Profit ITD - Beginning Profit)

Question 3

Total Estimated Costs

Answer 3

Total Estimated Costs = Actual Costs ITD + Estimated Remaining Costs

Total Estimated Costs may change every year and if there is a Gross Loss, recognize it immediately and reverse any previous profits.

Question 4

Percentage of Completion (B/S Presentation)

Answer 4

Accounts:

1. Costs and Estimated Earnings on Uncompleted Contract (Current Asset)
2. Progress Billings(Current Liability)

The two accounts are netted together and shown as “in excess of”.

Question 5

Costs and Estimated Earnings of Uncompleted Contract

Answer 5

Also called Construction in Progress

Total Costs Incurred and Estimated Earnings ITD

Question 6

Completed Contract Method (Requirement)

Answer 6

Unlike GAAP, IFRS does not allow Completed Contract Method. Cost recovery method is used if estimates are not avilable. Under this method, Revenues are cash in excess of costs incurred.

Question 7

Completed Contract Method (Calculations)

Answer 7

Just Gross Profit when complete. However, CIP and Progress billings are still recorded and netted just like completion method. (Same interim entries)

Question 8

Completed Contract Method (B/S Presentation)

Answer 8

Same as Percentage method, just without “estimated earnings” in the Current Asset portion.

1. Costs on Uncompleted Contract
2. Progress Billings

Question 9

JE During Construction (Same)

Answer 9

Record Cost, Billings, and Payments for Billings

Costs to CIP, Billings to A/R, Payments to A/R

Dr. CIP
Cr. Costs

Dr. A/R
Cr. Billings

Dr. Cash
Cr. A/R

Question 10

JE During Construction (Different)

Answer 10

Percentage Method: Records Estimated Gross Profit from costs and CIP

Dr. Cost (From LT Construction Contract)
Dr. CIP
Cr. Revenue (From LT Construction Contract)

Complete Contract Method: No Gross Profit entry, only Loss

Question 11

JE After Construction (Different)

Answer 11

Percentage Methods: Closeout construction accounts, revenue is already booked with previous entries.

Dr. Progress Billings
Cr. CIP

Complete Contract Method: Close each construction account out to Revenue and Cost accordingly.

Dr. Progress Billings
Cr. Revenue (From LT Construction Contract)

Dr. Cost (From LT Construction Contract)
Cr. CIP