XM, Ltd. was a small engineering firm that built high-tech robotic devices for electronics manufacturers. One very complex device was partially completed at the end of 2015. Barb McLauren, head engineer, knew the experimental technology was a failure and XM would not be able to complete the $ 20,000,000 contract next year. However, the corporation was getting ready to be sold in January. She told the controller that the device was 80% complete at year-end and on track for successful completion the following spring; the controller accrued 80% of the contract revenue at December 31, 2015. McLauren sold the company in January 2016 and retired. By mid-year, it became apparent that XM would not be able to complete the project successfully and the new owner would never recoup his investment.
1. For complex, high-tech contracts, how does a company determine the percentage of completion and the amount of revenue to accrue?
2. What action do you think was taken by XM in 2016 with regard to the revenue that had been accrued the previous year?