Question

Distinguish among the percentage-of-completion, cost recovery, and completed contract methods of accounting for long-term contracts with respect to income recognition. Under what circumstances should a company use the cost recovery method or the completed contact method?

Answer 1

Pecentage completion method completed contracts methods and cost recovery methods are commonly used in log terms contracts specially Building and constructions contracts etc.

Under Percentage completion method revenue and expenses etc are recognised on the basis of milestone stages completions.

If the project is supposed to be completed 50%, organisation would be recognising 50 % revenue and accrual cost associated with it.

Under Completed Contract methods all incomes and expenses and related costs are recognised when the whole project is completed which in general is mentioned in the contract terms and conditions.

Further cost recovery defines accounting method in which revenue and costs associated with the project is recognised during the period of sale but the profit is recognise only in the period when cash or collection is being done from the customers or buyer. In this business doesn't recognise any income related tot he sale till the time the cost part of the same is being realised from the customers or buyers.

Cost recovery method is used when bad debts are not able to recognised reasonably.

However completed contract method is used when there is uncertainity about the collection of funds from the parties.