The buyer can be expected to satisfy all obligations under the contract and C, The contractor can be expected to perform all contractual obligations. Completion of contract method is used according to ACCESS-32-25-90, When lack of dependable estimates… Herein 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. Percentage of completion method is inappropriate for this contract, not only because it’s difficult to estimate the cost, but also the product fails to fulfill the buyer’s need. In this case, choosing completion of contract is better decision; based on previous experience, Labor underestimate the cost and ability of omelet the contract is the main reason forces them to change the policy.
Change n method of accounting from the percentage-of-completion to the completed- contract is considering change in accounting principle. In ACCESS-10-45-2, it states clearly about company can use alternative accounting principle to better interpret the current financial issues. According to ACCESS-10-45-1, a presumption exists that an accounting principle once adopted shall… Consistent use of the same accounting principle from one accounting period to another… And with a,b criteria. Once a new accounting principle is adopted, entity should consistently practice.
Base on ACCESS-10-45-5, entity should use retrospective approach apply for the new accounting principle. There are three basic requirements to do: A. Back to prior accounting period, the change of cumulative effect must be showed once apply the new principle. B. Adjustment of the balance of retained earning must be made. C. Each individual financial statement from prior period shall apply the new principle. In Lobo’s case, once it changes the revenue recognition principle, the prior year’s venue will become less in completion of contract method.
Retain Earning account must be higher when using percentage of completion method. Therefore, retained earnings account needs to be adjusted. For current year, adjustment shall be made to beginning balance of retained earnings. Base on ACCESS-10-45-8, Retrospective application shall include only the direct detects to a change in accounting principle, including any related income tax effects. Using retrospective approach shall contain direct effects, in this case would be income tax from prior period which should be sees than the entity actual paid.