Aren’t We Done Yet?
LabCo is a large construction contracting firm that serves a variety of industrial customers that purchase machinery and equipment from LabCo. LabCo’s business primarily involves the design and manufacture of large industrial-sized machinery and tooling that is used by its customers in manufacturing parts and components for fighter jets, transport planes, and other aerospace-related machinery and equipment. All of LabCo’s construction contracts involve the design, development, and manufacture of machines that are unique and customized to the specifications of its customers. LabCo negotiates all its contracts with its customers on either a fixed-price or cost-plus basis. LabCo has developed an accounting policy to recognize revenue related to its customized construction contracts, which reads as follows:
The Company performs under a variety of contracts, some of which provide for reimbursement of cost plus fees, and others that are fixed-price-type contracts. Revenues and fees on these contracts are primarily recognized on a contract-by contract basis using the percentage-of-completion method of accounting, which is most often based on contract costs incurred to date compared with total estimated costs at completion (cost-to-cost method).
The completed-contract method of accounting is used in instances in which reliably dependable estimates of the total costs to be incurred under a specific contract cannot be made.
LabCo has entered into a contract with a customer, Halibut, to build a six-axis laser cutting machine that will be used by Halibut to cut airplane wings for a new fighter jet that will be sold by Halibut to a large government buyer. The contract entered into was for a fixed price and requires detailed and involved performance specifications. Upon entering into the contract, LabCo realized that this was a unique arrangement that required a great deal of customer specification in order to meet required performance standards. However, LabCo also
The Company performs under a variety of contracts, some of which provide for reimbursement of cost plus fees, and others that are fixed-price-type contracts. Revenues and fees on these contracts are primarily recognized on a contract-by contract basis using the percentage-of-completion method of accounting, which is most often based on contract costs incurred to date compared with total estimated costs at completion (cost-to-cost method).
The completed-contract method of accounting is used in instances in which reliably dependable estimates of the total costs to be incurred under a specific contract cannot be made.
LabCo has entered into a contract with a customer, Halibut, to build a six-axis laser cutting machine that will be used by Halibut to cut airplane wings for a new fighter jet that will be sold by Halibut to a large government buyer. The contract entered into was for a fixed price and requires detailed and involved performance specifications. Upon entering into the contract, LabCo realized that this was a unique arrangement that required a great deal of customer specification in order to meet required performance standards. However, LabCo also