Recognition of Revenues and Expenses
Response to the following problem:
On May 6, 2009, Sterling Corporation signed a contract with Stony Associates under which Stony agreed (1) to construct an office building on land owned by Sterling, (2) to accept responsibility for procuring financing for the project and finding tenants, and (3) to manage the property for 50 years. The annual profit from the project, after debt service, is to be divided equally between Sterling Corporation and Stony Associates. Stony is to accept its share of future profits as full payment for its services in construction, obtaining finances and tenants, and management of the project.
By April 30, 2010, the project was nearly completed and tenants had signed leases to occupy 90% of the available space at annual rentals aggregating $2,600,000. It is estimated that, after operating expenses and debt service, the annual profit will amount to $850,000. The management of Stony Associates believed that the economic benefit derived from the contract with Sterling should be reflected on its financial statements for the fiscal year ended April 30, 2010 and directed that revenue be accrued in an amount equal to the commercial value of the services Stony had rendered during the year, that this amount be carried in contracts receivable, and that all related expenditures be charged against the revenue.
Required:
Is the belief of Stony's management in accord with generally accepted accounting principles for the measurement of revenue and expense for the year ended April 30, 2010? Support your opinion by discussing the application to this case of the factors to be considered for asset measurement and revenue and expense recognition.