Methods on Calculating Realized Gross Profit :
- Percentage of Completion Method – with dependable estimates or known as cost to cost method.
- Zero Profit- with no dependable estimates.
Things to remember under Percentage of Completion Method:
*Contract Price equals Total Progress Billings (not in all circumstances)
*Contract Price Plus Escalation Clause of Contract Price Minus Penalty Clause (delay) = Progress Billings
*Contract retention – this does not have income element.(does not affect net income, witholding for protection)
Proforma entry Contract Retention:
Dr Cash xxx
Dr Contract Retention xxx
Cr Accounts Receivables xxx
Mobilization Fees – to transfer or to move the operations.(deducted from the bills of contractors).
*If estimated loss then it should be recognized immediately.
*The percentage of completion is always 100% during the last year of contract.
*Cost Incurred To Date is cumulative.
*Estimated Cost to Complete is decreasing amount.
Presentation on Balance Sheet CIP – PB
*If CIP is more than the PB due from customers (current asset).
*If CIP is less than the PB due to customers (current liability).
Items Included in the CIP:
Cost Incurred to Date and Realized Gross Profit to Date
*Due to or Due from at the end of Contract is Zero.
*Contract Price Multiply By % of Completion = CIP only applied if there is a profit.
Under Zero Profit Method – Percentage of Completion is either Zero or 100%