Question

Luke Windows Limited manufactures custom- made windows for homes. The company deals directly with some individual customers, but mainly does business with contractors that are building tract housing under contract with a developer— that is, a real property development company that is constructing a large number of houses in a single new development. For tract housing, Luke bids on the contract according to specifications given by the developer. The costs of preparing the bid are not substantial, but they are not insignificant either. If Luke wins the contract, the company then sets up a production line in the factory to manufacture the windows according to specification. As the windows are finished, they are stored in Luke’s factory temporarily, until the contractor is ready to receive them.
When they are delivered to the building site (usually in batches, not all together), the contractor is responsible for any damage or breakage that occurs. Also, the contractor is responsible for proper installation. Luke also provides a warranty to replace any defective windows if there is found to be a failure in the design or construction of the window after testing and inspection period by the developer (discussed in the following paragraph). The houses are built (and sold) in batches. The sales from one batch help the developer to Finance the next batch. After each batch of houses is finished and has been standing empty through a few rain or snow storms, the developer inspects for any failure in design, construction, or installation.
If all is satisfactory, the developer authorizes payment for that part of the development. Payment is made to the contractor, who then is responsible for paying Luke. In the unlikely event that the contractor does not pay Luke, Luke can establish a “lien” on the houses that requires the developer (or the new owners who have purchased the houses) to satisfy Luke’s claim.
Depending on the size of the housing development, the entire project, from bid preparation to final collection can take anywhere from two to five years. Each batch of houses usually is completed within about 18 months. However, Luke’s construction and delivery of the windows for a batch seldom takes more than two months.

Required:
1. From the information given, identify the point at which Luke should recognize revenue from windows for tract housing. Explain your reasoning.
2. Using the revenue recognition point identified in requirement (1), explain how Luke should account for costs and revenues related to this project over time.



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  • CreatedFebruary 17, 2015
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