Completion : Percentage-of-Com Philbrick Company and Completed Contract Methods
ID: 2541621 • Letter: C
Question
Completion : Percentage-of-Com Philbrick Company and Completed Contract Methods signed a three-year contract to provide sales training to the employees of Elliot The contract price is $1200 per employee and the estimated number of employees to be Comipds 400. he expected number to be trained in each year and the expected training costs follow. Number of employees 125 200 75 400 Training costs incurred $ 60,000 75,000 40,000 $175,000 2017.... Total REQUIRED a. For each year, compute the revenue, expense, and gross profit reported assuming reven recognized using the following method 1. P ercentage-of-completion method, where percentage-of-completion is determined by the number of employees trained. Percentage-of-completion method, where percentage-of-completion is determined by the costs incurred. Completed contract method. 2. 3. hich method d o you believe is most appropriate in this situation? Explain.Explanation / Answer
Answer a(1)
Percentage of Completion based on number of employees trained
Answer a(2)
Percentage of Completion based on cost incurred
Answer a(3) Completed service contract method:
Entire cost incurred in year 2016 & 2017 will be treated as work in progress and no cost will be expensed. Also no revenue will be recognised in year 2016 & 2017. In year 2018, when all the employees are trained and contract is completed, total contract cost of $ 175,000 will be treated as expense & revenue of $ 480,000 will also be recognised. As a result entire profit of $ 305,000 will be recognised in year 2018.
b) Most Appropriate method:
Completed Contract method: Since this method leads to recognition of revenue & cost only at the completion of contract, fair view of the operation of company is not reflected in the current scenario where the employees are trained each year and cost are also incurred. Thus this method is not appropriate.
2.Percentage Completion Method (based on cost): This method matched revenue with cost incurred during any particular period. This method is better than completed contract method since this distributes revenue & cost as well as resultant profit between different years.
3.Percentage Completion Method (based on no. of employees trained): Since in the given situation we can clearly identify that out of total employees how many are trained completely and each trained employee is a unit for recognition of income which can be segregated from complete contract, this method can be said to be most suitable in this sitiation. In contracts for building of bridges etc., such distinct units are not identifiable and hence under those scenarios pecentage completion method based on cost incurred is appropriate.
Year No. of employees trained % of work completion Revenue Recognised Cost Recognised Gross Profit 2016 125 31.25% 1,50,000 60,000 90,000 2017 200 50.00% 2,40,000 75,000 1,65,000 2018 75 18.75% 90,000 40,000 50,000 Total 400 100.00% 4,80,000 1,75,000 3,05,000Related Questions
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