[wishiwasaCPA]

Either I am a complete idiot, or Becker CPA is a rediculously poorly written study guide but one of the questions reads:

The next item is based on the following data pertaining to Pell Co.’s construction jobs which commenced in 1992:

Project 1 Project 2
Contract Price 420,000 300,000
Costs Incurred during 1992 240,000 280,000
Estimated costs to complete 120,000 40,000
Billed to customers during 1992 150,000 270,000
Receivd from customers during 1992 90,000 250,000

If Pell used the completed contract method, what amount of gross profit (loss) would Pell report in its 1992 income statement?

Answer: -20,000

I get how to get that answer (300,000-280,000-40,000) but what I don’t understand is why its only computed for project 2, and why the very next question asks for % of completion method and combines both projects gross profit for a positive 20,000?

What does the next item (which is bolded btw) even mean? Is it just referring to the question below? Where was the first item? It just comes out of nowhere and I have no idea if the wording is telling me why to compute completed contract only for project 2 and then percent completion for both or if this is just another poorly written question by Becker.

 

 

[Iron_Victory]

Nope not poorly written.

Completed contract method – we DO NOT recognized any revenue until the project is complete. We DO recognize losses immediately.

So project 1 is profitable in 1992 so we would not recognize any of that gain and only recognize the (20,000) gross loss on project 2

% of Completion – We DO recognize revenues because we have a reasonable way to estimate them. We DO recognize losses immediately.

So we have 420,000 total price and 360,000 projected total costs = 60,000 profit as of now

we have 240,000 in costs incurred and estimate 120,000 in further costs

so 240,000/360,000 = 66%

66% x 60,000 = 40,000 in profit recognized from project 1

netted against (20,000) from project 2

we are left with 20,000 gross profit

AUD - (74),78
BEC - 85
FAR - 86
REG - 84

[Iron_Victory]

Nope not poorly written.

Completed contract method – we DO NOT recognized any revenue until the project is complete. We DO recognize losses immediately.

So project 1 is profitable in 1992 so we would not recognize any of that gain and only recognize the (20,000) gross loss on project 2

% of Completion – We DO recognize revenues because we have a reasonable way to estimate them. We DO recognize losses immediately.

So we have 420,000 total price and 360,000 projected total costs = 60,000 profit as of now

we have 240,000 in costs incurred and estimate 120,000 in further costs

so 240,000/360,000 = 66%

66% x 60,000 = 40,000 in profit recognized from project 1

netted against (20,000) from project 2

we are left with 20,000 gross profit

AUD - (74),78
BEC - 85
FAR - 86
REG - 84

[Study Monk]

Iron Victory has it right..loss is recognized immediately and profits when contracts are done. If you want some accounting theory fun facts you recognize the loss immediately because of the conservative principle!:)

I spoke to an ancient wise man who sent me on a mushroom induced journey through an ancient forest to find the key to passing the CPA exam. A talking spider monkey told me to throw the last of my drinking water in the dirt to find what I was looking for. So I followed his instructions and the following message appeared in the soil:

"Do 5000 multiple choice questions for each section"

[Study Monk]

Iron Victory has it right..loss is recognized immediately and profits when contracts are done. If you want some accounting theory fun facts you recognize the loss immediately because of the conservative principle!:)

I spoke to an ancient wise man who sent me on a mushroom induced journey through an ancient forest to find the key to passing the CPA exam. A talking spider monkey told me to throw the last of my drinking water in the dirt to find what I was looking for. So I followed his instructions and the following message appeared in the soil:

"Do 5000 multiple choice questions for each section"

[mbeyene]

Whats maybe confusing is that the projects are for the same year where as the previous examples we have seen in the book were for several years and were computing the percentage of completion and reversing the loss from previous years. Here the loss is recognized immediately…

[Author]

Replies