Village Company is accounting for a long-term construction contract where revenue is recognized over time. The project is built to the customer’s specifications, and the customer can make changes as construction is ongoing. It is a 3-year, fixed-fee contract that is presently in its first year. The latest reasonable estimates of total contract costs indicate that the contract will be completed at a profit. Village will submit progress billings to the customer and has reasonable assurance that collections on these billings will be received in each year of the contract. The contract can be cancelled at any time by the customer who will retain control of any work done to date.
Required:
1.
State the time period at which the revenue from contract be accounted for over time versus at a point in time.
Any of the following three conditions must be met, for a “performance obligation” to be fulfilled over time versus a point in time:
2.
State the facts in the preceding situation that indicate that village must account for this long-term construction contract over time.
3.
State the manner in which the income recognized in each year of this long-term construction contract is ascertained using the cost-to-cost method of ascertaining progress toward satisfaction of the performance obligation.
4.
State the effect on income with respect to progress billings and collections on these billings.
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