Reference no: EM132213915

Question: Cannon Construction (Cannon or the Company), an SEC registrant, is a construction company that manufactures commercial and residential buildings. On March 1, 2017, the Company entered into an agreement with a customer, Thornock Square Aparents, to construct a residential aparent 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 aparent building. The aparent building will only transfer to Thornock Square Aparents once the construction of the entire building is complete. In addition, Thornock Square Aparents has various design requirements that would require Cannon to incur significant costs to rework the building prior to selling it to a customer other than Thornock Square Aparents.

To construct the aparent building, Cannon 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 Thornock Square Aparents residential buildings. These standard materials remain interchangeable with other items until they are deployed in Thornock Square Aparents building. The Company has made the following purchases and incurred the following costs throughout the construction progress:

A. As of June 30, 2017, in total, Cannon has purchased $75,000 of component parts. As of June 30, 2017, $25,000 of component parts remain in inventory and $50,000 have been integrated into the project. Further, Cannon has incurred $12,500 of direct costs to integrate the component parts into the Thornock Square Aparents construction project during the three months ended June 30, 2017.

B. During the three months ended September 30, 2017, Cannon 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, 2017. During the three months ended September 30, 2017, Cannon incurred an additional $50,000 of direct costs to integrate the component parts into the Thornock Square Aparents construction project.

C. As of September 30, 2017, Cannon determined that the project was over budget and revised its cost estimate from $1 million to $1.25 million.

D. As of December 31 2017, the construction project was completed. During the three months ended December 31, 2017, Cannon 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, 2017. Cannon has incurred $187,500 of direct costs to integrate the component parts into the Thornock Square Aparents construction project during the three months ended December 31, 2017.

If Thornock Square Aparents cancels the contract, Cannon 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. Cannon 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 Cannon.

Question from scenario:

1) Does the performance obligation meet any of the criteria for recognition of revenue over time? Discuss which criteria (if any) is met and how is met.

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: a. The three months ended June 30, 2017? b. The three months ended September 30, 2017? c. The three months ended December 31, 2017?

3) create a schedule summarizing your calculations to arrive at revenue to be recognized each year.