completed contract method, ch.25, stuck on a qbank q. from schweser

CFA Level I
#1

Hi everyone,

I am stuck on the below question. Your help would be much appreciated (there’s not details in schweser’s answer…)

An analyst has gathered the following data pertaining to Hegel Company’s construction projects, which began during 20X2:

Project 1 Project 2 Contract price $420,000 $300,000 Costs incurred in 20X2 240,000 280,000 Estimated costs to complete 120,000 40,000 Billed to customers during 20X2 150,000 270,000 Received from customers during 20X2 90,000 250,000

If Hengel used the completed contract method, what amount of gross profit (loss) would Hengel report in its 20X2 income statement for:

response is: project 1->0

project 2-> -20’000

Thanks!!!

#2

Completed Contract Method Under this method, no revenues or costs are recognized until the contract is completed. im not sure if i get the question right but no cost and revenues are recognized in both contracts

#3

Remember: A loss under the CC method (as well under the POC method) is recognized immediately, whereas under CC a profit is recognized only under completion.

Profit of the first project: 420’ – 240’ – 120’ = 60’ –> to be recognized under completion, hence no profit in 2002 Loss of the second project: 300’ – 280’ – 40’ = -20’ –> to be recognized directly in 202

Best, Oscar

#4

yes

#5

great thanks!

just a last question: what do they exactly mean with “cost to complete”?

Thanks

#6

Cost to complete would mean estimated remaining costs of the project

#7

thank you yaaywork! it’s maybe a stupid question but I’m used to Swiss accounting so it’s not that easy for me.

Have a nice evening ahead.

#8

Have a WONDERFUL day!!!

#9

Hello everybody!

I’m getting extremelly confused with this Revenues Recognition topic…

Can somebody summarize for me please when to use which method for both, USGAAP and IFRS in all situations, when sure about the outcome and not sure about the outcome?

Or just corrrect me if I am wrong or if I miss something:

NOT RELIABLE OUTCOME:

  • IFRS: Apply the Percentage of Completion MEthod as follows:

PROFIT when the Cost is Recovered

REVENUE according to the extent of cost incurred

COST in the same period incurred

  • US GAAP: Apply the _ Completed Contract Method _ .

Recognition of income only when the contract has finished.

RELIABLE OUTCOME:

  • IFRS: Recognize revenue and expenses according to the stage of completion (PERCENTAGE OF COMPLETION METHOD)

  • US GAAP the same as IFRS.

Now… I don’t know when to use _ Installment Sales _ and when to use C_ost Recovery Method_?

Thank you!

#10

…Oh, I think I got it.

The percentage of completion method and the completed contract method apply for long term contracts and the company doesn’t know exactly the total cost that will be incurred at the end of the contract.

Whereas the Installment Sales and Cost Recovery Method apply when the company is selling something and is not sure about the collection of cash.

Am I right?

Regards.

Liz.

#11

IDK that I would call IFRS percentage completion. I believe under IFRS if you are unsure of the outcome you just MATCH revenue to costs so you are not making a loss/profit until a reliable outcome can be determined. It is more similar to the completed contract method than it is % completion.

Someone feel free to correct me if I am wrong its been a while since I went over contracts.