How should the entity recognize revenue

Reference no: EM132136351

Question: ABC Construction (ABC or the "Company"), an SEC registrant, is a construction company that manufactures commercial and residential buildings. On March 1, 2018, the Company entered into an agreement with a customer, Village Apartments, to construct a residential apartment building for a fixed price of $1.5 million. The Company estimates that it will incur costs of $1 million to complete construction of the apartment building. The apartment building will only transfer to Village Apartments once the construction of the entire building is complete. In addition, Village Apartments has various design requirements that would require ABC to incur significant costs to rework the building prior to selling it to a customer other than Village Apartments.

To construct the apartment building, ABC 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 Village Apartments' residential buildings. These standard materials remain interchangeable with other items until they are deployed in a Village Apartments building. The Company has made the following purchases and incurred the following costs throughout the construction progress:

• As of June 30, 2018, in total, ABC has purchased $75,000 of component parts. As of June 30, 2018, $25,000 of component parts remain in inventory and $50,000 have been integrated into the project. Further, ABC has incurred $12,500 of direct costs to integrate the component parts into the Village Apartments construction project during the three months ended June 30, 2018.

• During the three months ended September 30, 2018, ABC purchased an additional $500,000 of component parts ($575,000 in total). Of the $575,000 of component parts, $325,000 remain in inventory and $200,000 have been integrated into the project during the three months ended September 30, 2018. During the three months ended September 30, 2018, ABC incurred an additional $50,000 of direct costs to integrate the component parts into the Village Apartments construction project.

• As of September 30, 2018, ABC determined that the project was over budget and revised its cost estimate from $1 million to $1.25 million.

• As of December 3, 2018, the construction project was completed. During the three months ended December 31, 2018, ABC purchased an additional $425,000 of generic component parts ($1 million in total). Of the $1 million component parts, $0 remain in inventory and $750,000 were integrated into the project during the three months ended December 31, 2018. ABC has incurred $187,500 of direct costs to integrate the component parts into the Village Apartments construction project during the three months ended December 31, 2018.

If Village Apartments cancels the contract, ABC 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. ABC 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 ABC.

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:

2a. The three months ended June 30, 2018?

2b. The three months ended September 30, 2018?

2c. The three months ended December 31, 2018?

Reference no: EM132136351

Questions Cloud

Can alabama sports marketing seek specific performance : One day, Gump gets into an argument with the developer. Gump refuses to perform any work until the problem is solved.

Constitute strong aspects of organisational : How do you think diversity, communication and organisational structure could potentially constitute strong aspects of organisational culture?

How many subtopics are in the industry you selected : The Financial Accounting Standards Board (FASB), is a domestic, not-for-profit organization based in Connecticut. For over forty years, the FASB has helped set.

Preparation for tracer methodology surveys : Consider the role that health information management has on preparation for tracer methodology surveys.

How should the entity recognize revenue : How should the entity recognize revenue for the satisfaction of its performance obligation? What amount of revenue should be recognized for the following period

Working on solutions to bed turnaround time : Your multi-disciplinary performance imporvement team is working on solutions to bed turnaround time.

Identify the bolded item or concept from then next : Being very specific clearly identify the bolded item or concept from then next. Find an example of an organization change and describe it using Lewin’s model.

Define methods allowed to determine comparable prices : Discuss the U.S transfer pricing regulations, including advance pricing agreements, arm's length standard, and methods allowed to determine comparable prices.

Strategic review and investment selection process : what are some investment strategies that can be used by Mr. Boldon in terms of turnover, strategic review and investment selection process.

User Account

All Pages