Assignment
Required: 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 four year contract to build a store for a fixed price of $8,000,000. You estimated your costs at 6,500,000. At the end of the 3rd year you estimated that you are 75% complete and your estimate to complete will be 8,500,000 because of labor problems. What are the two alternative methods that can be used to record revenue on this project and what is the affect if:
1. You estimate a total loss on the project.
2. You believe that the estimated costs can be reduced and you will make an overall profit on the project.
Case 2: Your company sells both new and used printers. Some of the printers are used by the company for 6 months and then sold as used printers. Should the used printers be sold as revenue or gain on sale?
Case 3-Your company sells a product bundle that costs $100,000, This product includes software valued at $75,000 and a 2 year service agreement with a value of $25,000 if sold separately. Your company installed the software on July 1, 2016, and the client paid $50,000; the 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.