Reference no: EM132779906

An entity, a construction company, enters into a contract to construct a commercial building for a customer on customer-owned land for a promised consideration of ?1 million and a bonus of ?200,000 if the building is completed within 24 months. The entity accounts for the promised bundle of goods and services as a single performance obligation satisfied over time because the customer controls the building during construction.

At the inception of the contract, the entity expects the following:

Transaction price ?1,000,000
Expected costs 700,000
Expected profit (30%) 300,000

• At contract inception, the entity does not expect to receive the bonus because it cannot conclude that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Completion of the building is highly susceptible to factors outside the entity's influence, including weather and regulatory approvals. In addition, the entity has limited experience with similar types of contracts.
• The entity determines that the input measure, on the basis of costs incurred, provides an appropriate measure of progress towards complete satisfaction of the performance obligation.

Information as of the end of the first year is as follows:

Costs incurred to date ?420,000
Total expected costs ?700,000

• The entity reassesses the variable consideration and concludes that the amount is still constrained.
• In the first quarter of the second year, the parties to the contract agree to modify the contract by changing the floor plan of the building. As a result, the fixed consideration and expected costs increase by ?150,000 and ?120,000, respectively. In addition, the allowable time for achieving the ?200,000 bonus is extended by 6 months to 30 months from the original contract inception date. At the date of the modification, on the basis of its experience and the remaining work to be performed, which is primarily inside the building and not subject to weather conditions, the entity concludes that it is highly probable that including the bonus in the transaction price will not result in a significant reversal in the amount of cumulative revenue recognized. In assessing the contract modification, the entity concludes that the remaining goods and services to be provided using the modified contract are not distinct from the goods and services transferred on or before the date of contract modification; that is, the contract remains a single performance obligation.

Problem 1: How much is the cumulative catch-up adjustment to revenue recognized on the date of contract modification? (round-off percentage of completion to one decimal place only)

a. 92,800
b. 91,200
c. 93,400
d. 89,200