Question

Nailed It! Construction (Nailed It! or the “Company”), an SEC registrant, is a construction company that manufactures commercial and residential buildings. On March 1, 2018, the Company entered into an agreement with a customer, Village Apartments, to construct a residential apartment building for a fixed price of $1.5 million. The Company estimates that it will incur costs of $1 million to complete construction of the apartment building. The apartment building will only transfer to Village Apartments once the construction of the entire building is complete. In addition, Village Apartments has various design requirements that would require Nailed It! to incur significant costs to rework the building prior to selling it to a customer other than Village Apartments. To construct the apartment building, Nailed It! acquires standard materials that it regularly uses in construction contracts for both residential and commercial buildings. These materials are used to manufacture generic component parts for inclusion in Village Apartments’ residential buildings. These standard materials remain interchangeable with other items until they are deployed in a Village Apartments building. The Company has made the following purchases and incurred the following costs throughout the construction progress: • As of June 30, 2018, in total, Nailed It! has purchased $75,000 of component parts. As of June 30, 2018, $25,000 of component parts remain in inventory and $50,000 have been integrated into the project. Further, Nailed It! has incurred $12,500 of direct costs to integrate the component parts into the Village Apartments construction project during the three months ended June 30, 2018. • During the three months ended September 30, 2018, Nailed It! purchased an additional $500,000 of component parts ($575,000 in total). Of the $575,000 of component parts, $325,000 remain in inventory and $200,000 have been integrated into the project during the three months ended September 30, 2018. During the three months ended September 30, 2018, Nailed It! incurred an additional $50,000 of direct costs to integrate the component parts into the Village Apartments construction project. • As of September 30, 2018, Nailed It! determined that the project was over budget and revised its cost estimate from $1 million to $1.25 million. • As of December 31 2018, the construction project was completed. During the three months ended December 31, 2018, Nailed It! purchased an additional $425,000 of generic component parts ($1 million in total). Of the $1 million component parts, $0 remain in inventory and $750,000 were integrated into the project during the three months ended December 31, 2018. Nailed It! has incurred $187,500 of direct costs to integrate the component parts into the Village Apartments construction project during the three months ended December 31, 2018If Village Apartments cancels the contract, Nailed It! will be entitled to reimbursement for costs incurred for work completed to date plus a margin of 20 percent, which is Copyright 2018 Deloitte Development LLC All Rights Reserved. Case 7: Nailed It! Construction Page 2 considered to be a reasonable margin. Nailed It! will not be reimbursed for any materials that have been purchased for use in the contract but have not yet been used and are still controlled by Nailed It!. Required: 1. Does the performance obligation meet any of the criteria or recognition of revenue over time? 2. How should the entity recognize revenue for the satisfaction of its performanceobligation? What amount of revenue should be recognized for the following periods: 2a. The three months ended June 30, 2018? 2b. The three months ended September 30, 2018? 2c. The three months ended December 31, 2018?

Answer 1

1.Does the performance obligation meet any of the criteria or recognition of revenue over time?

Answer: Yes.

When a construction takes a significant period of time to complete , the accounting for it is distributed over period of time. In other words when the "outcome of a construction contract can be estimated reliably, revenue and costs should be recognised in proportion to the stage of completion of contract activity. This is known as the percentage of completion method of accounting."

Here in this case with the three month ending June, September and December the expenses and revenue can be reasonable determined, so it meets the criteria of revenue recognition .

2.How should the entity recognize revenue for the satisfaction of its performanceobligation?

As there is no progress payment made to the contractor , the contractor shoud recognize the revenue "only to the extent of recoverable contract costs incurred."

2.a) What amount of revenue should be recognized for The three months ended June 30, 20X1

Particulars	Amount(in $)
Component part	50,000(75,000-25,000)
Add:Direct cost incurred	12,500
Total cost	62,500
Amount of revenue recognistion(Total cost +20%)	75,000

b) What amount of revenue should be recognized for The three months ended September 30, 20X1

Particulars	Amount(in $)
Component part	200,000(500,000-300,000)
Add:Direct cost incurred	50,000
Total cost	250,000
Amount of revenue recognistion(Total cost +20%)	300,000

c)What amount of revenue should be recognized for The three months ended December 31, 20X1

As the Construction is complete and the Villagers have not cancelled the contract the revenue needs to be fully recognised for $1.5mn. As the Component part of $250,000 is lost(not utilized in the project and not present in inventory, the cost is added in the project)

Particulars	Amount(in $)
Component part	1,000,000
Add:Direct cost incurred	187,500
Total cost(A)	1,187,500
Price quoted for contract(B)	1,500,000
revenue already recognised(C)	375,000
Revenue yet to be recognised(D)=(B)-(A)-(C)	(62,500)