For each of the scenarios, determine whether the seller should recognize (a) overtime or (b) when the product or service is completed. Explain your answer.
“Revenue Recognition”
Scenario 1: Crown Construction Company entered into a contract with Star Hotel for building a highly sophisticated, customized conference room to be completed for a fixed price of $400,000. Nonrefundable progress payments are made on a monthly basis for work completed during the month. Legal title to the conference room equipment is held by Crown until the end of the construction project, but if the contract is terminated before the conference room is finished
Scenario 2: Regent Company entered into a contract with Star Hotel for constructing and installing a standard designed gym for a fixed price of $400,000. Nonrefundable progress payments are made on a monthly basis for work completed during the month. Legal title to the gym passes to Star upon completion of the building process. If Star cancels the contract before the gym construction is completed, Regent removes all the installed equipment and Star must compensate Regent for any loss of profit on sale of the gym to another customer.
Scenario 3: On January 1, the CostDriver Company, a consulting firm, entered into a three-month contract with Coco Seafood Restaurant to analyze its cost structure in order to find a way to reduce operating costs and increase profits. CostDriver promises to share findings with the restaurant every two weeks and to provide the restaurant with a final analytical report at the end of the contract. This service is customized to Coco, and CostDriver would need to start from scratch if provided a similar service to another client. Coco promises to pay $5,000 per month. If Coco chooses to terminate the contract, it is entitled to receive a report detailing analysis to that stage
Scenario 4: Assume International Tower (Phase II) is developing luxury residential real estate and begins to market individual apartments during their construction. The Tower entered into a contract with Edwards for the sale of a specific apartment. Edwards pays a deposit that is refundable only if the Tower fails to deliver the completed apartment in accordance with the contract. The remainder of the purchase price is paid on completion of the contract when Edwards obtains possession of the apartment
Required:
For each of the scenarios, determine whether the seller should recognize (a) overtime or (b) when the product or service is completed. Explain your answer.
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