Completed contract method

CFA Level I
#1

NIgella company has a 3 year contract to build a manufacturing plant for $2,500. They ahve a reliable estimate that costs will be $2,000 over the life of the contract. The project has the following year-end billing amounts, cash received and costs incurred: Billed…1000…1000…500…2500 Cash received …700…1200…600…2500 Costs incurred…700…900…400…2000 Under completed contract method of revenue recognition, the total liabilities at the end of year 2 for Nigella will be A. 0 B. 100 C. 300 D. 400

#2

D? Advance Billings = 2000 Construction in progress = 1600 Net Advance Billings = 400

#3

correct what did you get for cash and RE in this cash for year 1 and year 2 under completed contract

#4

nevermind i see what you did…i was working it out the long way

#5

I would guess change in cash to be zero for year 1 and 300 for year 2. Retained earnings. Since the revenue is not being recognized, i would say no change in retained earnings. Where is this question from? Is it the CFAI sample? I just gave exam 3 and my brain is so fried…

#6

why do we subtract 1600 from 2000 and not 1900 (being the cash received)? i understand that adv. billings are 2000 but we collect 1900…?

#7

You basically net the Advanced Billings and Construction in Progress to detemine the net asset or liability The Net Advance Billing is a liability (since it represents services that you still need to provide the customer) So the net liability is Advanced Billing - Construction in Progress. The cash received in this case is a distractor .

#8

…One…Two…Three cash…0…300…500 a/r…300…100…0 CIP…0…0…0 assets… 300…400…500 a/p…0…0…0 AB…300…400…0 liabilities…300…400…0 equity…0…0…500

#9

thanks guys