Percentage of Completion Method-- Losses | Intermediate Accounting | CPA Exam FAR | Chp 18 p12

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Farhat's Accounting Lectures
Published at : 06 Dec 2020
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Percentage­of­Completion Method
*35. The percentage­of­completion method recognizes revenues, costs, and gross profits as a 
company  makes  progress  toward  completion  on  a  long­term  contract.  Companies  use  various 
methods  to  determine  the  extent  of  progress  toward  completion.  To  measure  the  extent  of 
progress in terms of  costs, units, or  value added,  companies often use input measures  (costs 
incurred,  labor  hours  worked)  and/or  output  measures  (units  of  delivery  measured  as  tons 
produced, floors of a building completed). 
Cost­to­Cost Basis 
*36. The most popular input measure used to  determine the progress toward  completion is the 
cost­to­cost  basis.  Under  this  basis,  a  company  measures  the  percentage  of  completion  by 
comparing  costs  incurred  to  date  with  the  most  recent  estimate  of  the  total  costs  required  to 
complete the contract. It then applies this percentage to the total  revenue or the estimated total 
gross  profit  on  the  contract.  The  resulting  amount  is  the  revenue  or  the  gross  profit  to  be 
recognized  to  date.  To  find  the  amounts  of  revenue  or  gross  profit  recognized  each  period,  a 
company subtracts total revenue or gross profit recognized in prior periods. 
*37. Under cost­to­cost basis, costs pertaining to the contract plus gross profit recognized to date 
are accumulated with debits to a Construction in Process account. Similarly, it credits Revenue 
from  Long­Term  Contracts  for  the  amounts  computed.  The  difference  between  the  amounts  is 
debited to a nominal account, Construction Expenses—which is reported in the income statement 
as the actual cost of construction incurred in that period. 
*38.  Generally,  when  a  company  records  a  receivable  from  a  sale,  it  reduces  the  Inventory 
account. Under the percentage­of­completion method, however, the company continues to carry 
both  the  receivable  and  the  inventory.  Subtracting  the  balance  in  the  Billings  account  from 
Construction in Process account avoids double­counting the inventory. The  company  reports in 
the  balance  sheet  the  difference  between  the  Construction  in  Process  and  the  Billings  on 
Construction in Process accounts. If that amount is a debit, it is reported as a current asset; if it is 
a  credit,  it  is  reported  as  a  current  liability.  At  times,  the  costs  incurred  plus  the  gross  profit 
recognized to date (the balance in Construction in Process) exceeds the billings. In that case, the 
company reports this excess as a current asset entitled “Costs and recognized profit in excess of 
billings.” 
Completed­Contract Method 
*39.  (L.O. 6) Under the completed­contract method, companies  recognize  revenue and gross 
profit  only  at  point  of  sale—that  is,  when  the  contract  is  completed.  Under  this  method, 
companies accumulate costs of long­term contracts in process, but they make no interim charges 
or  credits to  income  statement  accounts for  revenues,  costs,  or  gross  profit.  The  advantage  is 
that  reported  revenue  reflects final  results  rather than estimates of unperformed work. Its major 
disadvantage  is  that  is  does  not  reflect  current  performance  when  the  period  of  a  contract 
extends into more than one accounting period. 
*40. Under the completed­contract method, the company would make the same annual entries to 
record costs of construction, progress billings, and collections from customers as those illustrated 
under the percentage­of­completion method. The significant difference is that the company would 
not make entries to recognize revenue and gross profit.
loss on unprofitable contractcompleted contract method journal entriescompleted contract method vs percentage of completion

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