Question

Jupiter Inc. was established in 1985 by Joyce Fukomoto and initially operated under contracts to build highly energy-efficient, customized homes. In me 1990s, Joyce's two daughters joined the firm and expanded the company's activities into me high-rise apartment and commercial markets. When the company long-time financial manager retired, Joyce’s daughters hired Jean-Guy Beaulieu as controller. Jean-Guy, a former university friend of Joyce's daughters, had been working for a public accounting firm for me last four years.
When he reviewed me company's accounting practices, Jean-Guy noticed chat me company followed me completed-contract method of revenue recognition, as it always had since me years when individual home building was me company's main focus. Several years ago, most of me company's activities shifted to me high-rise and commercial building areas. From land acquisition co me completion of construction, most building contracts now cover several years.
Under the circumstances, Jean-Guy believes that me company should follow me percentage-of-completion method of accounting. From a typical building contract, Jean-Guy developed the following data:
Instructions
Under the earnings approach:
(a) Explain the difference between completed-contract revenue recognition and percentage-of-completion revenue recognition.
(b) Using me data provided for Jupiter Inc. and assuming me percentage-of-completion method of revenue recognition is used, calculate me company's revenue and gross profit for 2014 to 2016, under each of the following circumstances. Round all percentages to two decimal places.
1. Assume that all costs are incurred, all billings to customers are made, and all collections from customers are received within 30 days of billing as planned.
2. The company came across unexpected local bylaws that it had to comply with. The building site is in a wetlands area and it had to overcome environmental barriers to construction. As a result, the company had cost overruns of $1.2 million in 2014 to pay for changes to me site.
3. Further assume that, in addition to the cost overruns of $1.2 million for this contract, inflation was greater than expected when me original contract cost was set and caused an additional cost overrun of $1,240,000 in 2015. No cost overruns are expected to occur in 2016.


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  • CreatedSeptember 18, 2015
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