# Completed contract method

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

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

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

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

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…

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…?

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 .

…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

thanks guys