# You own a construction company and have recently received a contract with the local school district to refurbish one of its elementary schools. You are given an up-front payment from the school district in the amount of \$5 million. The contract terms extend from years 2018 to 2020. • When would you recognize revenue for this payment? • What method of accounting would you use for this construction project and why? • What would be the benefits and challenges with your method selection? • Give an example of your distribution selection and associated costs of the project (you may estimate based on other industry competitors). • What might be some benefits and challenges associated with the other method of construction revenue recognition?

FindFindarrow_forward

### Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685

#### Solutions

Chapter
Section
FindFindarrow_forward

### Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685
Chapter 9, Problem 5TP
Textbook Problem
1 views

## You own a construction company and have recently received a contract with the local school district to refurbish one of its elementary schools. You are given an up-front payment from the school district in the amount of \$5 million. The contract terms extend from years 2018 to 2020.• When would you recognize revenue for this payment?• What method of accounting would you use for this construction project and why?• What would be the benefits and challenges with your method selection?• Give an example of your distribution selection and associated costs of the project (you may estimate based on other industry competitors).• What might be some benefits and challenges associated with the other method of construction revenue recognition?

To determine

Introduction:

In normal cases, revenue is recognised when the work is complete. But, in case of long-term projects to follow the matching principle, revenue is recognised based the percentage of completion of contracts or when the work is complete based on the nature of contract.

To state:

Recognition of revenue from the contract. Also, the method of accounting used and its benefits along with the challenges of opting the same. Also, the alternative method available and its benefits and challenges.

### Explanation of Solution

In the given case of renovation of school contract, revenue is recognised on the basis of percentage of completion of method at the end of the period to follow the matching principle of accounting and to give a true and fair view of the state of the affairs of the company.

The method used is percentage of completion method, wherein the percentage of work completed is calculated and then it is divided by the total amount of the contract. This helps to distribute the total cost of project over the term of contract.

• Revenue is recognised within the period with expense giving true picture of the entity.
• Reduced risk as revenue is realised on timely basis.

Challenges of this method:

• Since percentage of completion is the process based on estimation which requires an expert, thus resulting in increased cost...

### Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

#### The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Find more solutions based on key concepts
What is a relationship?

Accounting Information Systems

Does the current Social Security system promote income equality? Why or why not?

Economics: Private and Public Choice (MindTap Course List)

Suppose you were comparing a discount merchandiser with a high-end merchandiser. Suppose further that both comp...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)