XM, Ltd. was a small engineering firm that built high-tech robotic devices for e

Question

XM, Ltd. was a small engineering firm that built high-tech robotic devices for electronics manufacturers. One very complex device was partially completed at the end of 2015. Barb McLauren, head engineer, knew the experimental technology was a failure and XM would not be able to complete the $20,000,000 contract next year. However, the corporation was getting ready to be sold in January. She told the controller that the device was 80% complete at year-end and on track for successful completion the following spring; the controller accrued 80% of the contract revenue at 12/31/15. McLauren sold the company in Jan 2016 & retired. By mid-year, it became apparent that XM would not be able to complete the project successfully & the new owner would never recoup his investment.

1. For complex, high-tech contracts, how does a company determine the percentage of completion & the amount of revenue to accrue?

2. What action do you think was taken by XM in 2016 with regard to the revenue that had been accrued the previous year?

Explanation / Answer

1. Revenue could be accrued based on the percentage of completion. For a high-tech product, an engineer should be qualified to estimate the percentage ofcompletion. The estimate might be based on the percentage of total costs incurred,the percentage of engineering steps completed, or some other reasonable criteria.The amount of revenue to accrue is equal to the percentage complete times thetotal estimated revenue.

2.XM would make an entry to debit a Loss and credit the AccountsReceivable account that had been recorded in 2015. Additionally, any costs thathad been capitalized in an asset account would be written off (removed from theasset account

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