Harry W. Pedroso
Intermedia Financial Accounting I
Aren’t We Done Yet?
LabCo is a contracting firm that specializes in the construction of machinery and equipment for different types of industries. All LabCo projects contracts are unique and they require some design and development. LabCo charges its customers two ways fixed-price or cost basis. LabCo uses the percentage of competition method to recognize revenue. LabCo started a contract with Halibut to make a six-axis laser cutting machine. The laser is going to be used by Halibut to cut airplanes wings for a new fighter jet.
Requirement 1: On the basis of the facts presented within the case overview, is LabCo’s accounting policy for the revenue treatment of its construction contracts reasonable?
The Financial Accounting Standards Board, which is a private not-for-profit organization, decrees the financial accounting and reporting standards. The FASB offers several solutions for revenues recognitions. One of them is the percentage of competition method. According to the FASB 605-35-25-57, “The percentage-of-completion method is considered preferable as an accounting policy in circumstances in which reasonably dependable estimates can be made and in which all the following conditions exist: Contracts executed by the parties normally include provisions that clearly specify the enforceable rights regarding goods or services to be provided and received by the parties, the consideration to be exchanged, and the manner and terms of settlement. The buyer can be expected to satisfy all obligations under the contract.The contractor can be expected to perform all contractual obligations”. In other words, the percent of competition method can be used if there can be an accurate estimate of the cost. The contract has to be very specific about the exchanging of goods or services. The two parties agree to satisfy the terms of the contract.
The FASB states that the complete contract method should be used,...