Revenue Recognition
Problem 1 - Revenue on Long-term contracts
Cressida Construction Company uses the percentage of completion method when total construction costs can be estimated. In 2014, Cressida began building a warehouse for Weller Furniture Company for $10,000,000 with the following details.
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12/31/14
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12/31/15
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12/31/16
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Costs incurred to date
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$2,000,000
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$3,000,000
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$8,500,000
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Estimated costs to complete
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5,000,000
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5,500,000
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-
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Billings to date
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7,000,000
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8,000,000
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10,000,000
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Collections to date
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3,000,000
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6,000,000
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10,000,000
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Instructions:
- Determine the amount of gross profit/loss that Cressida Construction Company will recognize in years 2014 - 2016, using the percentage-of-completion method. The contract was completed in the year 2016.
- Prepare all journal entries related to this construction project for the year 2015 only under the percentage of completion method.
- Suppose that Cressida Construction Company was not able to use the percentage-of-completion method and, instead, had to use the completed-contract method. How much gross profit would Cressida Construction Company recognize in years 2014 - 2016 under this method?
- What is the difference between a permanent loss (on a contract) and an interim loss. When do companies report permanent losses?
- List one benefit of using the percentage-of-completion and one benefit of using the completed-contract method to recognize revenue.
- Which method (percentage-of-completion or completed-contract method) will recognize the most gross profit OVERALL on the contract?
Problem 2 - Variable Consideration
Davidson Construction has entered a contract with Sunny Pines Community to build their civic center for $800,000. The project was to be completed in six months. However there is a stipulation in the contract that Davidson will receive a $25,000 bonus if the contract is satisfactorily completed before the six-month deadline. There is a 65% chance that the contract will be completed before the six-month deadline.
Required:
Determine the contract price, assuming that Davidson uses the expected value as its estimate of variable consideration.
Determine the contract price, assuming that Davidson uses the most likely value as its estimate of variable consideration.
Repeat questions 1&2, assuming that there is a 45% chance that the contract will be completed before the six-month deadline.
Problem 3
Lomax Company is a retailer of high-end office furniture. They also offer delivery and assembly for the items that they sell. The standalone price of one of their most popular items - the executive desk - is $1,300. Lomax Company only offers assembly services for items it sells. Lomax Company charges $150 for assembly of each item that it sells and $50 per item for delivery. Customers also have the option to pick up the item(s) themselves. Customers who purchase a desk with assembly and delivery receive a $50 discount on the entire package.
The desks are usually sold with the right to return. If a customer purchases a desk with delivery and assembly services, in the event Lomax Company does not complete the services satisfactorily, the customer is only entitled to a refund of the portion that represents the allocated cost (and not the standalone cost) of the service.
Instructions:
Assume that the desk, delivery and assembly are all considered separate performance obligations. Indicate the amount of revenues that should be allocated to the desk, the delivery, and to the assembly contract.
Bonus problem 1- Deferred Revenue
Baccio Candy Company is a subscription-based retailer of fine chocolates and sweets. Customers pay $180 per year and, in return, they receive a treat basket at the beginning of every month. Customers who sign up by the 15th of the current month will be entitled to receive their basket at the beginning of the next month. Customers who sign up on the 16th or thereafter will have to wait until the month following the next month to receive their basket. (So, if a customer signs up on February 17th, they will not receive their basket until the first week of April). Customers can only cancel at the end of their annual subscription period.
Baccio acquired the following subscription contracts at the beginning of the year 2016:
Date Number of customers
January 5 20 customers
January 18 13 customers
February 8 25 customers
February 14 10 customers
February 27 5 customers
March 3 18 customers
March 10 7 customers
March 19 5 customers
March 28 11 customers
Required:
Assume that Baccio prepares their financials on a quarterly basis. How much revenue will they report on their income statement for the period ended March 31st, 2016?