How does melindas proposed policy for revenue recognition

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Reference no: EM132767839

Question - Ready Home Construction Inc. is a Saskatchewan company that manufactures residential modular homes built to each customer's specifications. Ready Home has been in the modular home business for 2 years, and has experienced rapid sales growth during that time. Demand has been particularly high for Ready Home's newest modular home design, the Rockport.

Ready Home is a small corporation owned by a sole shareholder, Melinda Block. As a result, Ready Home follows ASPE. To finance the construction of a facility to manufacture the modular homes, the corporation borrowed $1.5 million from a local bank. While Ready Home Construction has generated modest profits over the past 2 years, cash flows have been limited, due to the need to purchase equipment and inventory to fulfill customer orders. Melinda is planning to approach the bank in the next month or two for another corporate bank loan to purchase more equipment for the business.

When the financial statements for Ready Home Construction are prepared for the most recent month of operations, Melinda instructs the company's new bookkeeper Ted to record revenues on custom orders when the contract is signed with the customer. Her justification is that each customer has a solid credit rating and has made a 15% deposit on each modular home ordered. In most cases, it takes the company 4 to 6 months to complete the order and deliver it to the customer. Additionally, the customer can cancel an order up to 1 month after the order is placed and receive a refund of the deposit previously made.

Required - How does Melinda's proposed policy for revenue recognition from custom orders violate the characteristics, elements, and principles of the Conceptual Framework for Financial Reporting. Specify: (1) the name of the foundational principle/ qualitative characteristic/element being violated; and (2) how it is being is violated.

Reference no: EM132767839

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