Question

Required: For each of the following independent items, indicate when revenue should be recognized.For each of the following independent items, indicate when revenue should be recognized.

Questions:

e. Growing, harvesting, and marketing of Christmas trees; the production cycle is ten years.

f. Building houses in a subdivision, when the project will take two years to complete and each house must be individually sold by the contractor. The contractor owns each house until title is transferred to the new owner.
g. Building houses in a subdivision, when the project will take two years to complete and the contractor is building the houses under a contract from the local government. The local government owns the land and the homes as they are constructed.

h. Selling undeveloped lots for future retirement homes in a western province, with very low down payment and long-term payment contracts.

i. Sale of a two-year parking permit by a parking garage, with one-half the sale price received at the time of the sale, and the remainder to be received in equal monthly payments over the period of the permit.

j. A fixed-price contract with the government to design and build a prototype of a space arm; the costs to complete the project cannot be reliably estimated. The government owns the arm throughout the contract.

k. A silver-mining company produces one million ounces of silver but stores the silver in a vault and waits for silver prices to increase.

Answer 1

e. Growing, harvesting, and marketing of Christmas trees; the production cycle is ten years.

In this case , the product is of the nature of Agricultural produce and the Fair value of the produce will be measured in each year end and the increase in Fair Value of the produce over the last period will be recognized as revenue.

f. Building houses in a subdivision, when the project will take two years to complete and each house must be individually sold by the contractor. The contractor owns each house until title is transferred to the new owner.

As the actual sale happens only when title of each house is individually transferred to the new owner, the revenue will be recognized when each house is sold by the contractor and the title is transferred to the new owner.

g. Building houses in a subdivision, when the project will take two years to complete and the contractor is building the houses under a contract from the local government. The local government owns the land and the homes as they are constructed.

As the contractor is not the owner of the property but is providing the construction service, the revenue will be recognized as per the contract with the local Government. Most of the cases the contract is for progressive billing or % of completion billing.

Accordingly revenue will be recognized as per the progress or work or % of completion.

h. Selling undeveloped lots for future retirement homes in a western province, with very low down payment and long-term payment contracts.

Assuming the undeveloped land is developed and retirement homes are made and delivered to the customer. In such case the revenue will be recognized as % of completion method and proportionate revenue corresponding to the completion percentage will be recognized.

i. Sale of a two-year parking permit by a parking garage, with one-half the sale price received at the time of the sale, and the remainder to be received in equal monthly payments over the period of the permit.

The one half of the sale price received at the time of parking lot sales will be recognized as deferred revenue over the two year period. Equal monthly payments will be recognized as revenue each month as per payment schedule.

j. A fixed-price contract with the government to design and build a prototype of a space arm; the costs to complete the project cannot be reliably estimated. The government owns the arm throughout the contract.

The full price agreed will be recognized as revenue when the prototype is delivered to Space arm, and the Space arm has no dispute regarding the performance of the protype and the transfer of risk and reward of the prototype is complete with the delivery.

k. A silver-mining company produces one million ounces of silver but stores the silver in a vault and waits for silver prices to increase.