ÀBC Construction an SEC registrant is a construction company that manufactures commercial and residential buildings. On March 1, 2018, the Company entered into an agreement with a customer, Village Apartments, to construct a residential apartment building for a fixed price of $1.5 million. The Company estimates that it will incur costs of $1 million to complete construction of the apartment building. The apartment building will only transfer to Village Apartments once the construction of the entire building is complete. In addition, Village Apartments has various design requirements that would require ABC to incur significant costs to rework the building prior to selling it to a customer other than Village Apartments. To construct the apartment building, ABC acquires standard materials that it regularly uses in construction contracts for both residential and commercial buildings. These materials are used to manufacture generic component parts for inclusion in Village Apartments’ residential buildings. These standard materials remain interchangeable with other items until they are deployed in a Village Apartments building. The Company has made the following purchases and incurred the following costs throughout the construction progress:
• As of June 30, 2018, in total, ABC has purchased $75,000 of component parts. As of June 30, 2018, $25,000 of component parts remain in inventory and $50,000 have been integrated into the project. Further, ABC has incurred $12,500 of direct costs to integrate the component parts into the Village Apartments construction project during the three months ended June 30, 2018.
• During the three months ended September 30, 2018, ABC purchased an additional $500,000 of component parts ($575,000 in total). Of the $575,000 of component parts, $325,000 remain in inventory and $200,000 have been integrated into the project during the three months ended September 30, 2018. During the three months ended September 30, 2018, ABC incurred an additional $50,000 of direct costs to integrate the component parts into the Village Apartments construction project.
• As of September 30, 2018, ABC determined that the project was over budget and revised its cost estimate from $1 million to $1.25 million.
• As of December 31 2018, the construction project was completed. During the three months ended December 31, 2018, ABC purchased an additional $425,000 of generic component parts ($1 million in total). Of the $1 million component parts, $0 remain in inventory and $750,000 were integrated into the project during the three months ended December 31, 2018. ABC has incurred $187,500 of direct costs to integrate the component parts into the Village Apartments construction project during the three months ended December 31, 2018.
If Village Apartments cancels the contract, ABC will be entitled to reimbursement for costs incurred for work completed to date plus a margin of 20 percent, which is considered to be a reasonable margin. ABC will not be reimbursed for any materials that have been purchased for use in the contract but have not yet been used and are still controlled by ABC.
Required:
1. Does the performance obligation meet any of the criteria or recognition of revenue over time?
2. How should the entity recognize revenue for the satisfaction of its performance
obligation? What amount of revenue should be recognized for the following
periods:
2a. The three months ended June 30, 2018?
2b. The three months ended September 30, 2018?
2c. The three months ended December 31, 2018?
a. Identification of relevant issues.
b. Identification and analysis of alternative solutions that may be possible.
c. Correctness of numbers derived and appropriateness of rationale provided for each alternative
d. Inclusion of specific recommendations and rationale behind them: i. e., why the solution you are recommending seems appropriate considering the facts of the case and the relevant guidance found in the accounting standards.