Question

You work for Altuve Company and you have been asked to research the issues presented in the case and questions and to prepare a memo that addresses the issues and questions.

Altuve Company, an SEC registrant, is a construction company that manufactures commercial and residential buildings. On March 1, 2019, the Company entered into an agreement with a customer, Judge Offices, to construct an office building for a fixed price of $3 million. The Company estimates that it will incur costs of $2 million to complete construction of the office building. The office building will only transfer to Judge Offices once the construction of the entire building is complete. In addition, Judge has various design requirements that would require Altuve to incur significant costs to rework the building prior to selling it to a customer other than Judge.

To construct the office building, Altuve 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 Judge Offices’ buildings. These standard materials remain interchangeable with other items until they are deployed in a Judge Offices building. The Company has made the following purchases and incurred the following costs throughout the construction progress:

• As of June 30, 2019, in total, Altuve has purchased $150,000 of component parts. As of June 30, 2019, $50,000 of component parts remain in inventory and $100,000 have been integrated into the project. Further, Altuve has incurred $25,000 of direct costs to integrate the component parts into the Judge Offices construction project during the three months ended June 30, 2019.

• During the three months ended September 30, 2019, Altuve purchased an additional $1,000,000 of component parts ($1,150,000 in total). Of the $1,150,000 of component parts, $350,000 remain in inventory and $600,000 have been integrated into the project during the three months ended September 30, 2019. During the three months ended September 30, 2019, Altuve incurred an additional $100,000 of direct costs to integrate the component parts into the Judge Offices construction project.

• As of September 30, 2019, Altuve determined that the project was over budget and revised its cost estimate from $2 million to $2.5 million.
• As of December 31 2019, the construction project was completed. During the three months ended December 31, 2019, Altuve purchased an additional $850,000 of generic component parts ($2 million in total). Of the $2 million component parts, $0 remain in inventory and $1,300,000 were integrated into the project during the three months ended December 31, 2019. Altuve has incurred $375,000 of direct costs to integrate the component parts into the Judge Offices construction project during the three months ended December 31, 2019.

If Judge Offices cancels the contract, Altuve 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. Altuve 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 Altuve.

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:
3. 1. The three months ended June 30, 2019?
   2. The three months ended September 30, 2019?
   3. The three months ended December 31, 2019?

Answer 1

The percentage of completion method of revenue recognition is a concept in accounting that refers to a method by which a business recognizes revenue on an ongoing basis depending on the stages of a project’s completion. In other words, the percentage of completion method is used for longer-term projects and recognizes revenue and expenses as a percentage of the project’s completion during the period.

The percentage of completion method indicates that revenue from performance obligations recognized over a period of time should be based on the percentage of completion. The method recognizes revenues and expenses in proportion to the completeness of the contracted project. It is commonly measured through the cost-to-cost method.

The entity should recognize revenue based on percentage of completion method for the satisfaction of its performance obligation.

Revenue should be recognized as follows for the three month ended June 30, 2019 as follows

		Amount in $
Percentage of completion
Percentage complete	=	Cost incurred to date
		Estimated total cost
	=	1,25,000 (refer note below)
		20,00,000
	=	6.25%
Revenue to be recognized	=	Contract price * Percentage complete till date computed above
	=	30,00,000 * 6.25
	=	1,87,500

Note

Cost incurred to date is equal to cost of component pare intergrated plus direct cost

i.e. $ 100,000 + $ 25,000

Revenue should be recognized as follows for the three month ended September 30, 2019 as follows

Percentage of completion
Percentage complete	=	Cost incurred to date
		Estimated total cost
	=	(100000+25000+700000+100000) (refer note below)
		25,00,000
	=	37.00%
Revenue to be recognized	=	Contract price * Percentage complete till date computed above - Revenue already reconized
	=	30,00,000 * 37% -1,87,500
	=	9,22,500

Note
Cost incurred to date is equal to cost of component part intergrated plus direct cost
i.e. Component part cost ($ 100,000 + $ 700,000)+ Direct cost ($ 25,000 + $ 100,000)
Cost of component consumed during 3 month of July to September 2019
opening		50,000
Add		10,00,000
Less: Closing		3,50,000
		7,00,000

Revenue should be recognized as follows for the three month ended December 30, 2019 as follows

As project is completed, total revenue should be recognized and revenue for three month ended December 30, 2019 as follows

Revenue to be recognized = Total revenue - Revenue already recognized

= $ 3,000,000 - $ 187,500 - $ 922,500

= $ 1,890,000