Case Study
Michael R. Bohatyritz
Intermediate 1 Accounting
12/1/12
For my role as a staff accountant, I was assigned to research the appropriate accounting for revenue treatment of construction contracts for a client, LabCo. In specific, I was assigned to oversee LabCos’ contract involving a six-axis laser-cutting machine with Halibut Co. After researching and developing a theory based on the Financial Accounting Standards Boards’ Codification, I have concluded that LabCos’ treatment of revenue was reasonable; however, they should have changed revenue recognition principles sooner. In this situation, there are three possible ways they can handle changing their accounting method: Retrospective Application, Change in Accounting Estimate Method, or Change in Estimate Affected by Accounting Principle.
The revenue treatment principle for a construction type principle states,
“In accounting for contracts, the basic accounting policy decision is the choice between two generally accepted methods: the percentage-of-completion method including units of delivery and the completed-contract method. The determination of which of the two methods is preferable is based on a careful evaluation of circumstances because the two methods should not be acceptable alternatives for the same circumstances (ASC 605-35-25-1).”
LabCo agreed to build a six-axis laser-cutting machine for Halibut. The contract entered into was a fixed price contract. A fixed price contract is, “An agreement to perform all acts under the contract for a stated price” (ASC 605-35-15-4). LabCo decided to use the percentage of completion method for recognizing income. “The percentage of completion method recognizes income as work on a contracts progress” (ASC 605-35-25-51). Income recognized shall be that percentage of estimated total income, either:
“That incurred costs to date bear to estimated total costs after giving effect to estimates of costs to complete based on most recent information, or that may
Intermediate 1 Accounting
12/1/12
For my role as a staff accountant, I was assigned to research the appropriate accounting for revenue treatment of construction contracts for a client, LabCo. In specific, I was assigned to oversee LabCos’ contract involving a six-axis laser-cutting machine with Halibut Co. After researching and developing a theory based on the Financial Accounting Standards Boards’ Codification, I have concluded that LabCos’ treatment of revenue was reasonable; however, they should have changed revenue recognition principles sooner. In this situation, there are three possible ways they can handle changing their accounting method: Retrospective Application, Change in Accounting Estimate Method, or Change in Estimate Affected by Accounting Principle.
The revenue treatment principle for a construction type principle states,
“In accounting for contracts, the basic accounting policy decision is the choice between two generally accepted methods: the percentage-of-completion method including units of delivery and the completed-contract method. The determination of which of the two methods is preferable is based on a careful evaluation of circumstances because the two methods should not be acceptable alternatives for the same circumstances (ASC 605-35-25-1).”
LabCo agreed to build a six-axis laser-cutting machine for Halibut. The contract entered into was a fixed price contract. A fixed price contract is, “An agreement to perform all acts under the contract for a stated price” (ASC 605-35-15-4). LabCo decided to use the percentage of completion method for recognizing income. “The percentage of completion method recognizes income as work on a contracts progress” (ASC 605-35-25-51). Income recognized shall be that percentage of estimated total income, either:
“That incurred costs to date bear to estimated total costs after giving effect to estimates of costs to complete based on most recent information, or that may