For each of the cases, 1. determine whether the seller should recognize revenue

Question

For each of the cases,

1. determine whether the seller should recognize revenue (a) over time or (b) when the product or service is completed.

2. Explain your answer using GAAP revenue recognition rules.

3. Explain how each would appear on the income statement and balance sheet.

Case 1: Your construction company entered into a contract with Mikes Motivational Presentation Company to remodel a building with customized furniture and fixtures, It is to be completed in 3 years at a fixed price of $5,000,000. Nonrefundable progress payments are made on a monthly basis for work completed during the month. If the project is cancelled Mike must pay for any work, furniture or fixtures completed to date. What if at the beginning of the second year, costs are estmated to be $5,500,000 to complete.

Case 2: Your Company entered into a contract to build 20 high end conference tables to be delivered at the end of 16 months for a fixed price of $250,000. by Z Company Your company plans to start delivering these tables at the end of 12 months, but that is based on the customers ' acceptance of the product. If Company Z cancels the order, they must compensate your company for any loss of profit on sale of the conference tables to another customer.

Case 3-Mikes Company licenses customer-relationship software to Bruce Inc. for 3 years. In addition to providing the software, Mike promises to provide consulting services over the life of the license to maintain operability within Bruces' computer system. The total transaction price is $200,000. Based on standalone values, Mike estimates the consulting services have a value of $75,000 and the software license has a value of $125,000. Upon installation of the software on July 1, 2016, Bruce pays $100,000; the contract balance is due on December 31, 2016. Identify the performance obligations and the revenue in 2016, assuming (a) the performance obligations are interdependent and (b) the performance obligations are not interdependent

Scenario 4: Your Company is developing luxury residential real estate and begins to market individual apartments during their construction. Your Company entered into a contract with Smith for the sale of a specific apartment. Smith pays a deposit that is refundable only if the your company fails to deliver the completed apartment in accordance with the contract. The remainder of the purchase price is paid on completion of the contract when Smith obtains possession of the apartment.

Explanation / Answer

Case 1 ) 1) Revenue should be recognized over time on the basis of its completion stage 2) Under Gaap any methods can be followed depending upon given situation I .e a) percentage completion method to recognise revenue can be used if relaiable estimates are available b) completed contract method Under Percentage completion method, revenue will be recognised on the basis of completion stage of construction, example 35 % completion means revenue recognition of 35 % When relaiable estimates can not be made then completed contract can be followed Under Completed contract method , revenue will be recognised only at end of contract. I,e when it is completely done 3) If relaible estimates are made at beginning of second year company can recognise its loss based on completion stage As amounts are received on monthly basis , only unbilled receivables for last month will appear as receivables Any amount received inn excess of work done will appear as liability

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