Revenue Recognition Alternatives
Response to the following problem:
The Smith Construction Company received a contract on September 30, 2010 to build a warehouse over a period of 18 months. The contract price was $600,000 and the estimated cost to build was $400,000. The actual (and estimated) costs incurred and the payments made by the purchaser are as follows:
Costs Payments
September 30-December 31, 2010 $120,000 $ 90,000
January 1-December 31, 2011 240,000 210,000
January 1-March 31, 2012 40,000 300,000
Required
1. Compute the amount of revenue, expense, and gross profit each year for each of the following methods:
a. Revenue recognition at the time of sale (completion)
b. Revenue recognition during production
c. Revenue recognition at the time of cash receipt
d. Cost recovery (compute only the gross profit)
2. Which method provides the most useful information to users? Under what circumstances would the other methods provide more useful information?