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, 20X1, 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, 20X1, in total, Nailed It! has purchased $75,000 of component parts. As of June 30, 20X1, $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, 20X1. •During the three months ended September 30, 20X1, 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, 20X1. During the three months ended September 30, 20X1, 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, 20X1, 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 20X1, the construction project was completed. During the three months ended December 31, 20X1, 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, 20X1. 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, 20X1.

If 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 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 performance obligation? What amount of revenue should be recognized for the following periods:

2a.The three months ended June 30, 20X1?

2b.The three months ended September 30, 20X1?

2c.The three months ended December 31, 20X1?

1. If company Nailed It! changes its initial cost estimate from 1,000,000 to 1,250,000 on September 30, 20x1 how does that impact revenue. I have been trying to understand how to use the input method on recording the revenue to the Nailed it! case. Can anyone help me understand it better? I understand 2a, and 2b. I do not understand 2c. I do not understand how the costs are different and how it became a loss of -62,500 at the end of December 31,20x1

2. I would like to know also how to understand the journal entries that i would need to apply at the end of the yearr.

I have already submitted the case for review two times, and both times no one has been able to give me the solid answer to this.

Answer 1

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

Yes, according to ASC 606-10-25-27 “An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognizes revenue over time, if one of the following criteria is met:

• a.  The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs.
• b.  The entity’s performance creates or enhances an asset (for example, work in process) that the customer controls as the asset is created or enhanced
• c.  The entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date.

In this situation criteria C. is met because Nailed it! Construction Company is purchasing material and using it for the construction of village apartment building and village apartment building has to pay for only those materials which are used in their construction and not required to pay for the inventory in stock for the performance made up to date.

It has also met the criteria of recognizing revenue over time on the basis of IFRS 15.

IFRS 15 Revenue from contract with customers standard has introduced a revenue model which states that “an entity recognizes revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.”

2. How should the entity recognize revenue for the satisfaction of its performance obligation? What amount of revenue should be recognized for the following periods:

For performance obligation satisfied overtime, an entity should select an appropriate measure of progress to determine how much revenue should be recognized as the performance obligation is satisfied.

2a. The three months ended June 30, 20X1?

Cost of components parts used                   $50,000

Direct cost                                                      $12,500

Recovery cost if contract cancelled            $12,500

Total revenue                                              $75,000

2b. The three months ended September 30, 20X1?

Cost of components parts used                  $200,000

Direct cost                                                      $50,000

Recovery cost if contract cancelled            $50,000

Total revenue                                           $300,000

2c. The three months ended December 31, 20X1?

Cost of components parts used                  $750,000

Direct cost                                                     $187,500

Recovery cost if contract cancelled            $187,500

Total revenue                                         $1,125,000