F2 LONG TERM CONTRACTS

Question 1

Completed Contract Method

Answer 1

Under completed contract method , you do not recognize profits until project is complete. You do recognize expected losses immediately in their entirety , in the year you estimate a loss.
Solve: (contract price - costs incurred to date - estimated costs to complete the contract)
- uses current asset accounts ( due on accounts receivable and construction in progress- cost of uncompleted contracts in excess of progress billings)
- uses current liability account ( progress billings on uncompleted contracts in excess of cost - excess billings)

Question 2

Percentage of Completion formula

Answer 2

Step 1 : compute gross profit of the completed contract
( contract price - estimated total cost) = gross profit
Step 2 : Compute percentage of completion
( total cost to date / total estimated cost of the contract)
Step 3: Compute gross profit earned ( profit to date)
( gross profit x % of job earned)
Step 4: PTD at current FYE and then you subtract out prior gross profit of the same job from past year , that gives you current year gross profit

Question 3

Percentage of Completion Loss Rule

Answer 3

An estimated loss on the total contract is recognized immediately in the year that it is discovered. Any gross profit recognized in prior years must be adjusted when calculating total estimated loss.
- you always take a 100% of the loss, so you can skip step 2 when a loss is discovered

Question 4

Revenue Recognition - Completed Contract

Answer 4

Revenue is recognized when the project is completed NOT when progress bills are collected or revenue exceeds costs

Question 5

Revenue Recognition - Percentage of Completion

Answer 5

Revenue is recognized using engineering estimates of completion or “costs incurred to date” vs. “total estimated costs”

Question 6

Percentage of Completion ( current assets and current liabilities)

Answer 6

Current Assets : due on account ( receivable) and costs and estimated earnings of uncompleted contracts in excess of progress billings ( sometimes called “ construction in progress”)
Current Liability : Progress billings in excess of cost and estimated earnings on uncompleted contracts

Accumulated costs ( actual costs incurred and paid)

Calculation for current asset or current liability;
Cumulative costs incurred
Add: cumulative gross profit recognized
Less : cumlative billings
______________________________________________
excess would be a current asset
difference would be a current liability

Question 7

IFRS

Answer 7

• under IFRS completed contract method is not permitted
• the percentage of completion method must be used unless the final outcome of the project cannot be easily estimated , in which case cost recovery method can be used to the extent that cash collected exceeds the costs incurred