Megrew Building Company is developing a multi- unit residential building complex. Kit Collier enters into a binding
Question:
Scenario 1. Collier pays a deposit of $ 10,000 that is refundable only if Megrew fails to complete construction of the unit in accordance with the contract. The remainder of the contract price of $ 240,000 is payable on completion of the contract when Megrew obtains physical possession of the unit. If Collier defaults on the contract before completion of the unit, Megrew only has the right to retain the deposit.
Scenario 2. Collier pays a $ 10,000 nonrefundable deposit upon entering into the contract and will make four progress payments during construction of the unit. The contract includes the following other terms:
• Megrew is precluded from being able to transfer the unit to another customer.
• Collier does not have the right to terminate the contract unless Megrew fails to perform as promised.
• If Collier defaults on its obligations by failing to make the promised progress payments, Megrew would have a right to all of the consideration promised in the contract if it completes the construction of the unit. ( The courts have previously upheld similar rights that entitle developers to require the customer to perform, subject to the entity meeting its obligations under the contract.)
Scenario 3. Use the same facts as in Scenario 2 except that in the event of Collier’s default, Megrew can either require Collier to perform as required under the contract or Megrew can cancel the contract, keep the unit under construction, and impose a penalty on Collier.
Required
For each scenario, determine whether the performance obligation is satisfied over time or at a point in time.
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Related Book For
Intermediate Accounting
ISBN: 978-0132162302
1st edition
Authors: Elizabeth A. Gordon, Jana S. Raedy, Alexander J. Sannella
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