Question

Chetwynd Renovations Ltd. (Chetwynd) is a recently formed company that renovates commercial and industrial properties in southern British Columbia. Chetwynd specializes in repairing damage cause by fire, floods, and other disasters. Chetwynd is a private company with five shareholders: Alex and Evan, brothers who operate the company, and three of their cousins, who live in different parts of the world. Alex and Evan have worked in the construction and renovation industries for several years and they feel they have the expertise to run a company of their own. The three cousins supplied about 70 percent of the cash Chetwynd needed to get started, with the remainder borrowed from the bank. Most of the money raised has been spent.
In December 2017, Chetwynd won a contract to renovate a building in Richmond, B.C. that had suffered significant damage in a fire. This will be Chetwynd's first large job. The renovations will take about 18 months to complete and work is scheduled to begin in early January 2018. Chetwynd will receive $5.88 million to do the renovations.
The contract specifies the following payment schedule:
• On commencement of work $ 300,000
• On the first day of each month beginning with the month after work begins ($210,000 per month for 18 months) 3,780,000
• On completion of the renovations 1,200,000
• 90 days after completion 600,000
• Total $5,880,000
From this amount, Chetwynd will have to pay the costs of the renovation, which it esti mates to be about $4,500,000. Construction costs are expected to be incurred evenly over the 18 months. Chetwynd's year-end is December 31.

Required:
a. What do you think Chetwynd's objectives of accounting might be? Explain.
b. How would you rank the objectives? Explain.
c. What different revenue recognition methods could Chetwynd consider for the warehouse project? How much revenue would be recognized in 2017, 2018, and 2019 under the different methods you identified? Show your work.
d. When would you recommend that revenue be recognized on the renovation project? Explain your recommendation. Make sure that you consider the constraints, facts, and objectives in your answer.



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  • CreatedFebruary 26, 2015
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