Comprehensive Revenue Recognition Problem. On September 1, 2016, Conboy Construction signed a contract with Venuti Enterprises to construct a new corporate headquarters and parking garage on land that Venuti owns. Conboy determines that control of the building is passed to Venuti as it is constructed but control of the parking garage will transfer when the garage is completed. Venuti will use the garage for its employees and open it for public parking.
The contract price is $40 million for both the building and the garage but Venuti includes a price adjustment for early or late completion of the building. For each day before September 1, 2018, that the building is completed, the promised consideration will increase by $30,000. For each day after September 1, 2018, that the building is incomplete, the promised consideration will be reduced by $30,000. Conboy considers it 70% likely that it will complete the building seven days early, 15% likely that it will complete the project on time, and 25% likely that the project will be delayed five days. The building is constructed based on Venuti's specifications and would require extensive alterations if used by another entity. The transaction has commercial substance and Venuti is in good financial health.
The parties have also agreed that the building will be inspected and assigned a green building certification level. If the building achieves the certification level specified in the contract, Conboy will be entitled to a bonus of $300,000. Conboy has been highly successful in achieving the certification on prior building projects.
The terms of the contract stipulate that Venuti will make a $40,000,000 payment to Conboy at the completion of the project. Conboy will have two years or 24 months (until September 1, 2018) to complete the project. Furthermore, Conboy has an enforceable right to demand payment related to performance to date based on time elapsed.
Conboy has constructed similar buildings for $30 million but does not have experience in garage construction. Conboy is aware of similar garages constructed by their competitors for $8 million.
Due to good weather, Conboy is able to complete the building early. Conboy completes the building and garage on August 21, 2018. Venuti receives control and legal title on these dates. The building also receives the required green building certification on August 21, 2018. Venuti pays Conboy any amounts owned on September 1, 2018.
Conboy has a normal profit margin of 15% and an interest rate of 10%. It allocates interest revenue on a straight-line basis. It is a calendar-year company that prepares financial statements annually. It uses time elapsed as its measure of progress for performance obligations that are satisfied over time.
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Perform the five steps in the revenue recognition process. Provide all necessary journal entries.