Long Term Construction Contracts

Methods on Calculating Realized Gross Profit :

  1. Percentage of Completion Method – with dependable estimates or known as cost to cost method.
  2. 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).

Proforma Computation

Long Term Construction

*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%

 

 

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About Jonathan Ruiz CPA

Entrepreneur, CPA Mentor, Stock market Newbie Mentor, Influential Author and Master's Degree in International Business graduate in Hult International Business School, UK. A father of two lovely daughters.
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