Under what circumstance would a contractor use the completed contract method?

Under what circumstance would a contractor use the completed contract method?

• A. Lots of short term contracts
• B. Contractor is unable to reasonably estimate the percentage of work performed or total costs to complete
• C. When the project is only minor in scope
• D. To maximize profit temporarily

Answer: (B)

The thing being tested is when you shouldn’t try to measure progress and instead defer revenue and profit until completion. The completed contract method is used when you cannot reasonably estimate how much of the job is done or what the total costs will be. If you can’t reliably determine the stage of completion or total costs, recognizing revenue and gross profit as you go (the alternative method) could misstate income, so you postpone the recognition until the contract is finished. In practice, costs are tracked in a construction-in-progress account, and revenue and profit are only recorded at project completion. Short-term or minor-scale projects aren’t the defining reason to use this method, and the goal isn’t to maximize profit—it's about reliability of estimates. When estimates can be made reliably, the percentage-of-completion method would be used instead.

The thing being tested is when you shouldn’t try to measure progress and instead defer revenue and profit until completion. The completed contract method is used when you cannot reasonably estimate how much of the job is done or what the total costs will be. If you can’t reliably determine the stage of completion or total costs, recognizing revenue and gross profit as you go (the alternative method) could misstate income, so you postpone the recognition until the contract is finished. In practice, costs are tracked in a construction-in-progress account, and revenue and profit are only recorded at project completion.

Short-term or minor-scale projects aren’t the defining reason to use this method, and the goal isn’t to maximize profit—it's about reliability of estimates. When estimates can be made reliably, the percentage-of-completion method would be used instead.