Reference no: EM132543230
Question - Apartment Builders of America (ABA) has extensive experience building the infrastructure (sewers, roads, power substations, etc.) for apartment complexes. ABA has entered into a three-year, $30 million construction contract to build the infrastructure for luxury apartment buildings on an attractive 200-acre tract of land owned by Got Land Inc. (GLI). GLI has an agreement in place to sell the land to Developer A for construction of apartments. Developer A has indicated they will construct 10 apartment complexes. Each complex will require 20 acres and the purchase and construction will begin by Developer A as soon as the infrastructure for a 20-acre parcel is completed. ABA is an efficient construction company. ABA estimates this project will require $15 million for material costs and 300,000 construction hours at an average cost of $30 per hour.
At the end of year one, 40 acres have been turned over to GLI, which, in turn, has sold the parcels to Developer A. ABA has done some work on the other parcels. Material costs of $4 million and 125,000 construction hours have been incurred.
During year two, another 100 acres were turned over to GLI, which, in turn, has sold the parcels to Developer A. ABA has done some work on the other parcels. From the inception of the contract, ABA has incurred material costs of $12 million and 220,000 construction hours.
During year three, the work on the infrastructure for the remaining 60 acres was completed and turned over to GLI.
a. What revenue should ABA record for this performance obligation at the end of each year using the input method?
b. What revenue should ABA record for this performance obligation at the end of each year using the output method?
c. Which method should management utilize if it is focused on maximizing revenue in year one?
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