Each of the following situations is independent of the others: 1. Jefferson Contracting enters into a contract

Question:

Each of the following situations is independent of the others:

1. Jefferson Contracting enters into a contract with a customer to build a new café. The café is conveniently located on a long stretch of highway that, with a number of other rest stations including a gas station, is known to be very busy. The customer pays an upfront deposit equal to 10% of the total fee of $2.2 million. The remaining balance will be financed by Jefferson. To protect themselves from nonpayment, Jefferson has included a stipulation in their agreement that on the event of default, it will take possession of the land and of any progress to date. Jefferson has agreed that in the event of nonpayment no further recourse will be held against the customer. Customer takes possession of the café when it is complete.

  1. 2. A condo builder, Drysdale Ltd., is selling individual units in a new building in downtown Montreal. Construction has not yet commenced, but it is expected to begin in the next few weeks and to take 24 months. Drysdale has entered into a contract with an investor looking to purchase 10 units that they plan to rent out using both short- and long-term rentals. The contract contains two payment options:

    • . $3.7 million up front at the inception of the contract; or

    • . $4.2 million in 24 months when the units are complete.

  2. The rate implicit in the contract rate is determined to be 8.8% based on the noted payment terms. Drysdale’s incremental borrowing rate is 6.5%. The investor has opted to make an upfront payment of $3.7 million.

  3. 3. JJR is in the software engineering company that builds information systems for large organizations. It enters into a contract to build a new system for a company that owns restaurants across the country. The development of the system will be completed over an 18-month period. During the initial development phase, the restaurants will not have direct access to the system, aside from information provided in update meetings and during testing. The system is expected to be fully installed and functioning at the end of the 18-month period. The total contract is worth $10.5 million, payable in 3 equal payments at 7 months, 13 months, and 19 months. The payments are due 1 month after the corresponding significant predetermined milestones (which occur at 6 months, 12 months, and 18 months).


Required:

For each situation, assess the five steps and determine when revenue is recognized.

Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Intermediate Accounting Volume 1

ISBN: 9781260881233

8th Edition

Authors: Thomas H. Beechy, Joan E. Conrod, Elizabeth Farrell, Ingrid McLeod-Dick, Kayla Tomulka, Romi-Lee Sevel

Question Posted: