Sierra Logging Company hired Reid Construction Company to build a new bridge across the Brown Trout River. The bridge would extend a logging road into a new stand of timber. The contract called for a payment of $12 million on completion of the bridge. Work was begun in 20X0 and completed in 20X2. Total costs were as follows:
20X0 ..........$ 2 million
20X1 .......... 3 million
20X2 .......... 5 million
Total .......... $10 million
1. Suppose the accountant for Reid Construction Company judged that Sierra Logging might not be able to pay the $12 million.
a. How much revenue would you recognize each year under current revenue- recognition standards?
b. How much revenue would you recognize each year under the proposed revenue- recognition standards?
2. Suppose Sierra Logging is a subsidiary of a major wood products company. Therefore, receipt of payment on the contract is reasonably certain. How much revenue would you recognize each year under current revenue-recognition standards?