Windsor Contracting Ltd. has been delaying the recognition of revenue until its contracts are complete. In the past, the company has focused on performing small renovation and home improvement jobs that typically lasted from two weeks to three months. The company has a very good reputation for quality work and fair pricing. Due in large part to its strong reputation, the company has begun to expand its operations to include larger contracts that may take up to two years to complete. Dan Fielding, the president, is thrilled with the company's success but is a little concerned about accepting these larger contracts. He contacts you, John Philpot, a local accountant, to obtain some advice on the accounting for these larger long-term contracts.
"John," Dan says to you, "I'm concerned about accepting these long-term contracts. If I can't recognize any of the revenue associated with these jobs until they're completed, my income statement is going to look very poor for the years when the contracts are in progress but not completed. I'll need financing to undertake these large jobs and the bank needs a yearly income statement to support my line of credit. What do you suggest?"
Required:
As John Philpot, write a memo to Dan Fielding, addressing his concerns. Your memo should focus on a discussion of the percentage of completion method of accounting for revenue recognition and how this method would meet the needs of Windsor Contracting. The memo should also include a discussion of any estimates that Windsor will have to make to apply this method of revenue recognition.