5. Hollub Homes Hollub Homes has set the standard for innovative custom home bui

Question

5. Hollub Homes Hollub Homes has set the standard for innovative custom home building and renovations in South Florida for 60 years. The company serves communities canvas in South Florida from Pinecrest to Coral Gables and Miami Beach to Boca Raton and Palm Beach. They renovate commercial properties, from entire floors to specific services, such as heating or air conditioning installation and maintenance. Contracts are generally at a fixed price. Assume on June 1, 2016, Hollub signs a contract with Innovate Company to renovate a floor of their condo building for $35 million. Innovate leases the floor in the 15-story building to a party unrelated to both companies. The contract price covers all materials, labor, and incidental expenses; the renovation is expected to take one year. Innovate is required to pay $10 million up front for materials and other costs, and $2 million per month for the next 11 months. A retention provision permits Innovate to hold $3 million for six months after completion, pending acceptance based upon curing any deficiencies. The contract requires Innovate to pay an additional $500,000 if the work is completed by May 31, 2017. Hollub currently recognizes revenue using the percentage-of-completion method, measured by the percentage of cost incurred to date relative to the estimated total cost of each contract. Contract costs include all direct material, direct labor, subcontractor, and other costs directly related to contract performance. In the process of tearing down the walls, Hollub finds water damage that needs repair. QUESTIONS: For each question please list the authoritative reference from the FARS database that supports your answer.

1. Does the June 1, 2016 contract have commercial substance? Why or why not?

2. Does the change order for the water damage repair represent a separate contract? Discuss the options and the risks.

3. What is the transaction price of the June 1, 2016 contract and how should it be recognized?

Explanation / Answer

ANSWER 1

YES, CONTRACT DO HAVE A COMMERCIAL SUBSANCE AS HOLLUB HOMES IS DOING SAME WORK SINCE 60 YEARS, AND IN THE GIVEN CASE CO UNDERTOOK THE RENOVATION FOR INNOVATE COMAPNY,THOUGH FLOOR REALTE TO SOME UNRELATED PARTY, BUT MAIN MOTO AND AGNDA OFCONTRACT IOS RENOVATION ONLY SO IT WILL BE CONSIDERED AS A CONTRATC HAVING COMMERCAIOL SUBSTANCE, AS GIVEN THAT HOLLUB HOMES DID RENOVATION FOR COMMERCAIL PROPERTIES ONLY AND GENRALLY FOR FIXED PRICE, ALL THESE WILL NOT CHANGE THE MATERIALLITY OF WORK ie RENOVATION..

ANSWER 2

YES, CHANGE ORDER FOR THE WATER DAMGE REPAIR IS A SEPARATE CONTRACT, AS WATER REPAIRING WAS NOT PART OF RENIVATION CONTRACT, IT IS A ADDITIONAL THING ARISES WHILE DOING RENOVATION, BUT NOT PART OF IT, HENCE IT IS A SEPARATE CONTRACT.

RISK IS THAT IF IT WONT BE REPAIRED THAN PROPER RENOVATION COULD NOT BE TAKEN PLACE, SO IT IS IMPORATNAT TO REPAIR IT FIRST THEN TO CARRY OUT RENOVATION WORK.

ANSWER 3

TRANSACTION PRICE ON JUNE 1,2016 IS $ 35 MILLION AS ADDITIONAL $5MILION IS CONDITIONAL PRICE. SO IT IS $35 MILION ONLY.

IT IS TO BE RECOGNISED IN ASSETS SIDE OF BALANCE SHEET, AND WILL REDUCE AMOUNT AS AND WHEN RECIEVED FROM TIME TO TIME.

JOURNAL ENTRY WILL BE

ACCOUNTS RECEIVABLE A/C DR. $35 MILLION

TO BIILING OF RENOVATION CONTRACT A/C CR. $ 35 MILLION.

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