Question

XM, Ltd. was a small engineering firm that built high-tech robotic devices for electronics manufacturers. One very complex device was partially completed at the end of 2018. Barb McLauren, head engineer, knew the experimental technology was a failure and XM would not be able to complete the $20,000,000 contract next year. However, the corporation was getting ready to be sold in January. She told the controller that the device was 80% complete at year-end and on track for successful completion the following spring; the controller accrued 80% of the contract revenue at December 31, 2018. McLauren sold the company in January 2019 and retired. By mid-year, it became apparent that XM would not be able to complete the project successfully and the new owner would never recoup his investment. Requirements

1. For complex, high-tech contracts, how does a company determine the percentage of completion and the amount of revenue to accrue?

2. What action do you think was taken by XM in 2019 with regard to the revenue that had been accrued the previous year?

Answer 1

QUES 1
Revenue could be accrued in the percentage of completion. For a high-tech product, an engineer must be qualified to estimate the completion percentage. The estimate may be based on the percentage of total costs incurred, the percentage of completed engineering steps, or some other reasonable criteria. The amount of income to accumulate is equal to the percentage complete the estimated total income

QUES 2
In 2019, XM would make an entry to charge a loss and credit accounts receivable from the account that had been registered in 2018 In addition, costs that were previously activated in an asset account would be written off (withdrawn from the asset account).

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