Question

Consider each of the following scenarios separately, assuming the company accounts for the arrangement:
Scenario 1: Crown Construction Company enters into a contract with Star Hotel for building a highly sophisticated, customized conference room to be completed for a fixed price of $400,000. Nonrefundable progress payments are made on a monthly basis for work completed during the month. Legal title to the conference room equipment is held by Crown until the end of the construction project, but if the contract is terminated before the conference room is finished, the Hotel retains the partially completed job and must pay for any work completed to date.
Scenario 2: Crown Company enters into a contract with Star Hotel for constructing and installing a standard designed gym for a fixed price of $400,000. Nonrefundable progress payments are made on a monthly basis for work completed during the month. Legal title to the gym passes to Star upon completion of the building process.
If Star cancels the contract before the gym construction is completed, Crown removes all the installed equipment and Star must compensate Crown for any loss of profit on sale of the gym to another customer.
Scenario 3: On January 1, the CostDriver Company, a consulting firm, enters into a three-month contract with Coco Seafood Restaurant to analyze its cost structure in order to find a way to reduce operating costs and increase profits. CostDriver promises to share findings with the restaurant every two weeks and to provide the restaurant with a final analytical report at the end of the contract. This service is customized to Coco, and Cost Driver would need to start from scratch if it provided a similar service to another client. Coco promises to pay $5,000 per month. If Coco chooses to terminate the contract, it is entitled to receive a summary report detailing analyses to that stage.
Scenario 4: Assume Trump International Tower (Phase II) is developing luxury residential real estate and begins to market individual apartments during their construction. The Tower enters into a contract with Edwards for the sale of a specific apartment. Edwards pays a deposit that is refundable only if the Tower fails to deliver the completed apartment in accordance with the contract. The remainder of the purchase price is paid on completion of the contract when Edwards obtains possession of the apartment.
Required:
For each of the scenarios, determine whether the seller should recognize revenue over time or when the product or service is completed. Explain your answer.



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  • CreatedDecember 23, 2013
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