Floyd Corporation is a large engineering and construction company that designs and builds office buildings, apartment buildings, distribution warehouses and other structures for its customers. Projects usually begin with a design and engineering phase, followed by construction of the customer's facility. The design/engineering and construction activities take place in separate divisions of Floyd Corporation, and these two divisions bill separately for their work.

Atypical three-year project might have the following pattern of work and billing (in$ millions).

REQUIRED

a. Assume that Floyd Corporation determines that the work of the design/engineering division and the construction division are separate performance obligations, that these performance obligations are satisfied over time. and that cost incurred is reflective of the value transferred to the customer. For years I, 2. and 3, determine the amount that Floyd Corporation will recognize in revenue and expense. What is the margin percentage reported in each year'?

b. Assume that Floyd Corporation determines that the work of the design/engineering division and the construction division requires too much coordination to be considered separate performance obligations. The combined performance obligation is satisfied over time and cost incurred is reflective of the value transferred to the customer. For years I, 2. and 3, determine the amount that Floyd Corporation will recognize in revenue and expense. What is the margin percentage reported in each year?

c. If this is a typical project, how does the performance obligation assessment affect the company's financial statements? For example, how is the debt-to-equity ratio (total liabilities ÷ total shareholders' equity) affected?

Transcribed Image Text:

Design/Engineering Construction Total Cost Billings to Cost Billings to Cost Billings to Year incurred customer incurred customer incurred customer 1. 7 10 7 10 2 3 15 12 17 15 3....... 1 10 18 11 20 Total .... 10 15 25 30 35 45