Florida Contractor Practice Exam

What percentage must a contract reach to be considered complete under the completed contracts method of accounting?

1. 100%

2. 95%

3. 97%

4. 98%

The correct answer is: 98%

Under the completed contracts method of accounting, a contract is considered complete when it reaches 100% of the project's completion. However, in the context of determining the point at which revenue recognition can be considered, the industry standard allows for a threshold below 100% to recognize certain elements of completion. While one might think of percentages such as 95% or even 97%, the concept aligns closely with the practical application wherein the accepted completion for practical purposes—such as final inspections, adjustments, and client confirmations—can be recognized at a point that feels operationally complete. The option of 98% can represent a compromise between a contract being operationally complete while still allowing for minor adjustments or pending inspections, which might occur at that final completion stage. Thus, a contract can be viewed as complete when sufficiently advanced toward its totality of performance, allowing for eventual revenue recognition in the accounting cycle. It's important for contractors to understand the significance of these percentages in their financial reporting and project management to ensure compliance with accounting standards and to plan effectively for cash flow.