ASC 705: Completed Contract Method Revenue Recognition Journal Entries

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The ASC 705 Cost of Sales and Services focuses on the recognition of revenue and costs associated with delivering goods or rendering services. Revenue recognition is essential for accurate financial reporting, and the Completed Contract Method (CCM) is a revenue recognition approach used for long-term contracts. In this article, we will explore how the CCM works under the ASC 705 Cost of Sales and Services guidance and explain the associated journal entries.

 

Understanding the Completed Contract Method

The Completed Contract Method (CCM) is a revenue recognition approach that defers the recognition of revenue and associated costs until a contract is completed. Under CCM, businesses do not recognize any revenue or expenses related to a contract until the project is finished, and all performance obligations are met. This method is commonly used for long-term contracts, such as construction projects, where the outcome cannot be reasonably estimated or when the percentage of completion method is not appropriate.

 

ASC 705 Cost of Sales and Services: Revenue Recognition under Completed Contract Method Transaction

According to the ASC 705, companies should recognize revenue when the performance obligations have been satisfied, and the control of goods or services has been transferred to the customer. Under the Completed Contract Method, revenue recognition is deferred until the contract is completed, and all performance obligations have been fulfilled.

To illustrate the Completed Contract Method, let's look at an example:
 

ABC Construction Company enters into a contract to build a commercial building for a total contract price of $500,000. The project is expected to take two years to complete. The costs incurred during the construction are as follows:

 

• Year 1: $200,000

• Year 2: $250,000

 

Journal Entries for Completed Contract Method Transactions

The journal entries for the Completed Contract Method are as follows:

 

1.Record construction costs:

 

Year 1:

Dr. Construction in Progress (CIP) $200,000

• Cr. Accounts Payable $200,000

 

Year 2:

Dr. Construction in Progress (CIP) $250,000

• Cr. Accounts Payable $250,000

 

2. Recognize revenue and cost of goods sold (COGS) upon contract completion:

 

Revenue Recognition:

 

Dr. Accounts Receivable $500,000

• Cr. Construction Revenue $500,000

 

COGS Recognition:

 

Dr. Construction Revenue $450,000 (Total costs incurred)

• Cr. Construction in Progress (CIP) $450,000

 

3. Record the profit on the contract:

 

Profit Recognition:

 

Dr. Construction in Progress (CIP) $50,000

• Cr. Construction Profit $50,000
  
   

The Completed Contract Method of revenue recognition is an essential approach for long-term contracts where the outcome cannot be reasonably estimated or when the percentage of completion method is not suitable. By following the ASC 705 Cost of Sales and Services guidance, businesses can ensure that their revenue and associated costs are recognized accurately in their financial statements. Understanding the journal entries for Completed Contract Method transactions can help both financial professionals and business owners to better comprehend the impact of revenue recognition on their company's financial health.