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Completed Contract Method | Intermediate Accounting | CPA Exam FAR | Chp 18 p11

hello and welcome to the session and

which look and which would look at the

completed contract method so the first

thing is we want to know is when do we

use the completed contract method so

before we look at the completed contract

method I just want to remind you that if

you don't understand how the percentage

of completion work then you should not

look at the completed contract method

because in the percentage of completion

we explained I would say 80 to 90

percent of the completed contract method

so if you don't understand how

percentage of completion method would

look at the previous session okay let's

go back and look at when do we when do

we use the completed contract method the

completed contract method the completed

contract method is used when the company

has a short term contract so if you have

a short term contract you can use the

completed contract method or the company

cannot meet the conditions for using a

percentage of completion so we cannot

use the percentage of completion what

are the condition of the percentage of

completion method these are the

conditions for the percentage of

completion you can not meet any of these

conditions and I went over those

conditions in the prior session or there

are inherent has inherent hazards and

the contract beyond the normal

reoccurring business so there must be

some type of a hazard inherent hazard to

the project that that we cannot really

estimate or put our hands on under those

circumstances and there actually any one

of those conditions then you can use the

CC or the completed contract method now

how do we do the accounting for the

completed contract method I'm gonna go

over the an example with you but it's

very important that you look at the

percentage of completion first because

if you don't you're gonna find hard time

understanding the completed contract

method okay

the completed contract method actually

it's easier than percentage of

completion

assuming you understand percentage of

completion so I cannot emphasize this

enough okay complete a contract method

companies recognize revenue and gross

profit only at the point of sale so

that's the first thing we want to know

that is when the contract is completed

so when

so the question is when can we record

revenue it's at the end and this is the

completed contract method when can we

recognize revenue it's at the end of the

project when the project is completed

versus the percentage of completion we

could recognize revenues and profit as

obviously revenues and profit when can

we recognize revenues and gross profit

and that's when the project has ended

under this method which is the completed

contract method companies accumulate

cost of long term construction process

just like we did in the in the in the

percentage of completion but they make

no interim charges or credits to income

statement accounts for revenues cost and

gross profit so we don't involve the

income statement the revenues and costs

so no entries for revenues cost and

gross profit that doesn't make any sense

so when do we when do we do this then we

do this at the end at the end of the

project would record revenues cost and

gross profit so the revenues cost and

gross profit is basically in a sense it

doesn't occur until the end of the

period so what happen as we are working

on this project we're going to be only

involving the balance sheet accounts the

construction and process the billing the

account receivable but no income

statement accounts until the end so

let's take a look at an example okay and

we're going to be working this example

which is we we did work it as a

percentage of completion method we're

gonna be working let me see this example

right here the Casper construction but

using the completed contract CC not

percentage of completion okay so take a

minute take a look at the data when we

did word this example as the percentage

of completion method

hopefully you you captured all the data

which is the contract price

cost incurred current here estimated

cost to complete the project billing as

well as cash receipts so let's take a

look at the journal entries for the

completed contract method those are the

entries for year one debit construction

and process credit cash for the 150,000

so we spent 150,000 to build whatever we

were building we build the client 135

debit accounts receivable Credit Billing

debit cash credit account receivable to

receive the billing all these accounts

are balance sheet account notice no

income statement account no income

statement account 2015 we did the same

thing we we incurred two hundred eighty

seven thousand four hundred in

construction and process we will debit

that credit cash debit account

receivable Credit Billing debit cash and

credit accounts receivable once again we

do the same exact thing we only involve

balance sheet account and again we are

working in case you are wondering what

we are doing here we are working an I

keep going back and forth but it's worth

mentioning we are looking at this

example so we're doing the same thing as

2015 only the balance sheet account by

2016

what happened by 2016 by 2016 the

project is completed so by 2016 by 2016

the project is completed what does that

mean if the project is completed okay

it means we did the work now

the completed contract method what does

it what does it state it says you

recognize revenue once the project has

been completed and guess what did we

completed the project absolutely in 2016

in 2016 we completed the project so on

2016 will do the regular entries you

know the construction and process the

the balance sheet account then what we

do as well we would look at the income

statement account at this point we will

impose

the income statement account so those

are the income statement accounts and

they are not affected until 2016 why

2016 because 2016 we completed the

project so 2014 2015 and 2016 we record

or the balance sheet accounts and we

don't recognize any profit until the

project has been completed why because

we are being conservative because we are

assuming here that we could not estimate

the cost this project we are assuming it

doesn't meet the percentage of

completion method companies just wanna

let you know companies prefer to use the

percentage of completion why because if

they if they use the percentage of

completion they can do what they can

they can estimate some profit they can

estimate some profit not estimate they

can record some revenues and profit as

they are doing the work this is the

beauty of the percentage of completion

under the completed contract method

under the completed contract method no

revenues is recorded no revenues is

recorded until when until the project is

completed and what is the project

completed is 2016 that that's why it's

called the completed contract method it

means you don't recognize anything

completed contract method you don't

recognize anything until the process the

the project is completed so the revenue

is 675 total cost the 607 and profit is

675 now at the end again we can soul

just like what we did in the percentage

of completion we can solve the billing

and we can solve the CIP account those

need to be cancelled so this is

completed contract method and that's why

I kept emphasizing do not attempt the

completed contract method until you

understand the percentage of completion

because the balance sheet entries we

covered those in the percentage of

completion hopefully this makes sense

so notice no no revenues or expenses in

2014 or 2015 only it happened in 2016

why 2016 we completed the project so

everything is deferred so notice on the

income statement nothing for 2014

nothing for 2015 on the income statement

not no accounts no amounts appear there

the accounts appear when the project is

complete

which is 2016 we have revenue 675 cost

of construction 607 500 and gross profit

660 7,000 now on the balance sheet and

the first year we had to count

receivable of twenty two thousand five

hundred cost and profit over billing

fifteen thousand and year two we had 120

of account receivable and billing over

cost which is we explained this is a

liability now because we build more than

we did work at fifty seven six hundred

and pretty much this is the completed

contract method basically it's a

conservative method conservative in what

sense conservative is you don't

recognize the revenue until the project

is completed now once again why not

because you failed some of the

conditions you failed not some you just

have to fail one of the conditions for

the percentage of completion so he did

you know that's maybe it's a short-term

project or you failed one of these

conditions you could not estimate the

cost you're not sure that the that the

buyer is expected to satisfy that

obligation because maybe it's a shaky

buyer and you're not sure if you're

gonna complete this project but you are

taking your chances so you don't

recognize any profit until the project

is completed this is the completed

contract method think of think of the

term completed contract method completed

means done recognize the revenue once

the project is done this is how we do

that if you have any questions any

comments by all means email me or see me

in class and if this lecture does not

make any sense the completed contract

method it's because you fail to

understand the percentage of completion

method so go back and view the

percentage of completion the next topic

we're gonna go back to is we're gonna be

doing accounting that's involved project

would losses so we're gonna go back

revisit the percentage of completion

revisit the completed contract method

however we're gonna be assuming we're

gonna be assuming that the project that

we are undertaking incurring a loss

either a loss in the current period but

the project it's still profitable or

loss on the whole project or the project

is no longer profitable altogether so we

need to do accounting for this scenario

and the scenario

the next recording if you have any

questions by all means email me or see

me in class