Completed Contract Method

Completed contract method is an approach used for construction contract accounting in which the revenue is recognized only when the contract is 100% complete. In contrast to the percentage of completion method, which records estimated revenue in each period based on the percentage of completion of the contract, the completed contract method defers contract revenue. However, even the completed contract method does not defer recognition of related costs and expenses.

Gross profit on a completed contract = total contract price – contract costs

Total revenue and total gross profit recorded under both the methods are same. The methods differ in the inter-period distribution of revenue and gross profit.

Example and Journal Entries

Metro Structures, Inc. is a diverse construction group. On 1 January 2011, it won a 3-year contract to construct an intra-city dedicated bus tracks for a total price of $300 million.

Following is a summary of the costs incurred, amounts billed and amounts collected.

201120122013
Amounts in million
Costs incurred$80$100$40
Estimated cost to complete$150$1000
Amount billed$100$100$100
Amount collected$90$130$80

Solution

Total gross profit on the contract
= $300 million – ($80 million + $100 million + $40 million)
= $80 million.

2011

Following journal entries are made:

  1. To record the cost incurred:
    Work-in-progress$80 M
    Accounts payable and others$80 M
  2. To record the amount billed:
    Accounts receivable$100 M
    Billings$100 M
  3. To record the collections:
    Cash$90 M
    Account receivable$90 M

2012

The journal entries will be similar to those in previous period.

  1. To record the cost incurred:
    Work-in-progress$40 M
    Accounts payable and others$40 M
  2. To record the amount billed:
    Accounts receivable$100 M
    Billings$100 M
  3. To record the collections:
    Cash$80 M
    Account receivable$80 M

2013

In addition to the journal entries to record costs, billings and collection, in the last year of the contract, a journal entry is recorded to recognize the gross profit.

  1. To record the cost incurred:
    Work-in-progress$100 M
    Accounts payable and others$100 M
  2. To record the amount billed:
    Accounts receivable$100 M
    Billings$100 M
  3. To record the collections:
    Cash$130 M
    Accounts receivable$130 M
  4. To record the revenue:
    Billings (100 + 100 + 100)$300 M
    Contruction Contracts Revenue$300 M
  5. To expense out the work-in-progress:
    Cost of construction$220 M
    Work-in-progress (80 + 100 + 40)$220 M
    The difference i.e. $80 million is the gross profit on the contract ($300 million - $220 million).

Written by Obaidullah Jan, ACA, CFA <--- Hire me on Upwork