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2058 WordsDec 14, 20149 Pages
MEMO LabCo Ltd. To: Mr. Ocbal- CFO LabCo Ltd. From: Linh Le, CPA Date: 11/25/2014 Re: Recommendation for revenue treatment for a construction contract with Halibut Inc., During our last meeting, you requested that I review LabCo’s accounting policy over the revenue treatment for your contract with Halibut Inc. After reviewing the various requirements of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 250-10 and 605-35, I conclude that: Using the percentage of completion method was appropriate. Changing from the percentage of completion method to the completed contract method is reasonable. Your changes in the accounting method is the change in the accounting estimate. In this memo, I will…show more content…
Question 2: Should LabCo change its method of accounting for the Halibut contract from the percentage of completion method to the completed contract method? After entering the Halibut contract, LabCo experienced significant difficulties in the design and manufacture of the machine, so LabCo no longer could estimate the total cost of the contract. The initial machine designs had to be redone, you had to outsource more engineering jobs due to the termination of a key member of the engineering team, and the cost of steel had risen unexpectedly. Last but not least, the machine you built for Halibut did not meet Halibut’s specifications, so you had to rebuild the machine. The inherent hazard that LabCo is experiencing raises the question about the reliable estimation of total contract cost. ASC 605-35-25-90 recommends that any company in your situation uses the completed contract method for revenue treatment: When lack of dependable estimates or inherent hazards causes forecasts to be doubtful, the completed-contract method is preferable. Inherent hazards relate to contract conditions or external factors that raise questions about contract estimates and about the ability of either the contractor or the customer to perform all obligations under the contract. Inherent hazards that may cause contract estimates to be doubtful usually differ from inherent business risks. Business entities engaged
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