Reference no: EM132419184

Problem: Altuve Company, an SEC registrant, is a construction company that manufactures commercial and residential buildings. On March 1, 2019, the Company entered into an agreement with a customer, Judge Offices, to construct an office building for a fixed price of $3 million. The Company estimates that it will incur costs of $2 million to complete construction of the office building. The office building will only transfer to Judge Offices once the construction of the entire building is complete. In addition, Judge has various design requirements that would require Altuve to incur significant costs to rework the building prior to selling it to a customer other than Judge.

To construct the office building, Altuve acquires standard materials that it regularly uses in construction contracts for both residential and commercial buildings. These materials are used to manufacture generic component parts for inclusion in Judge Offices' buildings. These standard materials remain interchangeable with other items until they are deployed in a Judge Offices building. The Company has made the following purchases and incurred the following costs throughout the construction progress:

• As of June 30, 2019, in total, Altuve has purchased $150,000 of component parts. As of June 30, 2019, $50,000 of component parts remain in inventory and $100,000 have been integrated into the project. Further, Altuve has incurred $25,000 of direct costs to integrate the component parts into the Judge Offices construction project during the three months ended June 30, 2019.
• During the three months ended September 30, 2019, Altuve purchased an additional $1,000,000 of component parts ($1,150,000 in total). Of the $1,150,000 of component parts, $350,000 remain in inventory and $600,000 have been integrated into the project during the three months ended September 30, 2019. During the three months ended September 30, 2019, Altuve incurred an additional $100,000 of direct costs to integrate the component parts into the Judge Offices construction project.
• As of September 30, 2019, Altuve determined that the project was over budget and revised its cost estimate from $2 million to $2.5 million.
• As of December 31 2019, the construction project was completed. During the three months ended December 31, 2019, Altuve purchased an additional $850,000 of generic component parts ($2 million in total). Of the $2 million component parts, $0 remain in inventory and $1,300,000 were integrated into the project during the three months ended December 31, 2019. Altuve has incurred $375,000 of direct costs to integrate the component parts into the Judge Offices construction project during the three months ended December 31, 2019.

If Judge Offices cancels the contract, Altuve will be entitled to reimbursement for costs incurred for work completed to date plus a margin of 20 percent, which is considered to be a reasonable margin. Altuve will not be reimbursed for any materials that have been purchased for use in the contract but have not yet been used and are still controlled by Altuve.

Required:

1. Does the performance obligation meet any of the criteria or recognition of revenue over time?
2. How should the entity recognize revenue for the satisfaction of its performance obligation? What amount of revenue should be recognized for the following periods:
3. The three months ended June 30, 2019?
4. The three months ended September 30, 2019?
5. The three months ended December 31, 2019?