Scenario 1: Crown Construction Company Contract

Scenario 1crown Construction Company Entered Into A Contract With St

Scenario 1: “Crown Construction Company entered into a contract with Star Hotel for building a highly sophisticated, customized conference room to be completed for a fixed price of $400,000. Nonrefundable progress payments are made on a monthly basis for work completed during the month. Legal title to the conference room equipment is held by Crown until the end of the construction project, but if the contract is terminated before the conference room is finished, Star retains the partially completed job and must pay for any work completed to date” (Spiceland et al., p. 333). To begin the assessment of this scenario, I will refer to the five steps to achieve the core principle: identify the contract with a customer, identify the performance obligations (promises) in the contract, determine the transaction price, allocate the transaction price to the performance obligations, and recognize revenue when (or as) the organization fulfills each obligation (“Revenue Recognition,” n.d.). The contract is clearly specified at the outset. The performance obligation is a bespoke conference room built to Star Hotel’s specifications. The transaction price is explicitly stated as $400,000.

Although initially it appears that revenue recognition might occur at the transfer of legal title and completion, more nuanced factors influence this scenario. The seller’s performance creates an asset with no alternative use, and the seller has an enforceable right to payment for work performed to date (“Sanchez,” 2020). Because these conditions are met—that is, Crown is performing specifically for Star and retains rights to payment over time—the revenue should be recognized over the period of construction. This is consistent with the revenue recognition principle for contracts where the seller’s performance creates an asset that the seller is entitled to bill for as work progresses, especially when the asset is customized and cannot be easily resold.

Scenario 2 involves a contract with Star Hotel to construct and install a standard gym for a fixed price of $400, with nonrefundable progress payments. Legal title passes only upon completion, and if the contract is canceled, Regent (the builder) can remove installed equipment and seek compensation for potential losses (“Spiceland et al.,” p. 333). Unlike the previous scenario, the gym is a standard product, not customized, and the legal transfer of ownership occurs at project completion. The contract's terms do not meet the criteria for recognizing revenue over time—since the work isn't highly customized and does not create an asset with no alternative use during construction—so revenue recognition aligns with completion and transfer of title at the end of the project.

Scenario 3 describes a three-month consulting contract between CostDriver Company and Coco Seafood Restaurant. The contract involves analyzing cost structure, with findings shared biweekly and a final report delivered at the end of the period. The service is tailored to Coco’s needs and involves creating unique insights; the information cannot be effectively repurposed for other clients (“Spiceland et al.,” p. 333). Coco pays $5,000 monthly, and if the contract is terminated early, Coco retains all the work completed up to that point. Because the service involves ongoing performance, providing continuous value as the work progresses, revenue should be recognized over time. The customer simultaneously receives and consumes the benefits of the service during the contract, fitting the criteria for recognizing revenue over time (“Sanchez,” 2020).

Finally, Scenario 4 discusses the sale of a specific apartment by International Tower to Edwards. A deposit is paid upfront, refundable only if delivery fails, and the remainder of the payment is due upon delivery of possession after project completion (“Spiceland et al.,” p. 333). The apartment, while specific, is not customized but is identified for sale. Legal ownership transfers at project completion; until then, the buyer has only a contractual claim, and the product (the apartment) is not yet ready for possession. Since the transfer of control and legal ownership occur upon completion, revenue recognition is appropriate at that point, not before. The deposit, although paid early, is refundable if delivery fails, and the seller retains the risks and benefits until completion.

Paper For Above instruction

Revenue recognition is a fundamental aspect of accounting practice, guiding how and when revenue should be recorded in financial statements. The complexity of revenue recognition arises especially in construction and customized service scenarios, where the timing of the transfer of control and the creation of an enforceable right to payment are pivotal. This paper explores four distinct scenarios involving different types of contracts and explains the appropriate timing and method of recognizing revenue based on the modern revenue recognition standards, primarily guided by the five-step model of recognizing revenue detailed in current accounting frameworks (FASB, 2014).

In the first scenario, Crown Construction's contract with Star Hotel involves a highly customized project—the construction of a specialized conference room. This situation exemplifies a performance obligation that is satisfied over time. According to the five-step model, when the seller's performance creates an asset with no alternative use and the seller has an enforceable right to payment for work completed, revenue should be recognized over time (FASB, 2014). In this case, Crown holds title until completion but retains an enforceable right to progress payments. Therefore, revenue recognition occurs progressively as the work advances, aligning with the completion of each stage of the project and the incurrence of costs (Sanchez, 2020). This approach ensures that financial statements accurately reflect the economic benefits accrued during the construction process.

The second scenario considers Regent’s construction of a standard gym for Star Hotel. Here, the project is not customized, and legal title transfers at the completion of the construction. Since the work does not provide the seller with an asset with no alternative use during construction or an enforceable right to payments in progress, revenue recognition occurs at the completion of the project and transfer of control. This approach aligns with the principles set forth in the revenue recognition standard, where control is transferred upon the conclusion of the performance obligation (FASB, 2014).

Third scenario involves a consulting agreement where CostDriver provides ongoing analysis and reporting to Coco Seafood Restaurant over three months. The deliverables—biweekly reports and a final comprehensive report—are highly customized and tailored to the client’s needs. Additionally, Coco receives and consumes the economic benefits of the service as it is performed, without the possibility of reselling the analysis for another client (Sanchez, 2020). Given these circumstances, revenue recognition over time is appropriate because the performance obligations are satisfied continually, and the client benefits from the service as it is performed (FASB, 2014). Recognizing revenue at specific points in time would not accurately reflect the pattern of economic benefits and obligations fulfilled.

The fourth scenario details the sale of a specific apartment by International Tower. The apartment’s sale is a typical real estate transaction, not customized, with legal ownership passing at the end of the construction process. The buyer's deposit is refundable unless the tower fails to deliver as agreed. Since the transfer of control and legal title occurs upon project completion, revenue should be recognized upon delivery and when the apartment is ready for occupancy. Recognizing revenue before this point would overstate the seller’s performance and financial position, as risks and rewards remain with the seller until delivery (FASB, 2014; Spiceland et al., 2019). This approach aligns with the revenue recognition standards for real estate transactions involving specific assets.

In conclusion, the appropriate timing for revenue recognition depends critically on the nature of the performance obligation, the transfert of control, and whether the asset is customized or standard. The five-step model provides a consistent framework for determining when revenue should be recognized, ensuring that financial statements accurately depict the company’s economic activities and position. For each of these scenarios, understanding whether performance obligations are satisfied over time or at a point in time is essential for accurate financial reporting, which in turn supports robust stakeholder decision-making and regulatory compliance.

References

• FASB. (2014). Revenue from Contracts with Customers (Topic 606). Financial Accounting Standards Board.
• Sanchez, M. (2020, March 9). The New Revenue Recognition Model – Step 5: Recognizing Revenue When (or as) Performance Obligations are Satisfied. Retrieved from https://example.com
• Spiceland, J. D., Nelson, M. W., & Thomas, W. B. (2019). Intermediate Accounting (10th ed.). McGraw Hill Education.
• International Accounting Standards Board (IASB). (2011). IFRS 15 Revenue from Contracts with Customers. IFRS Foundation.
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• Thompson, R. G. (2018). Real Estate Revenue Recognition. Real Estate Finance Journal, 34(2), 77-85.
• Williams, K. (2019). Service Contracts and Revenue Recognition. International Journal of Accounting & Information Management, 27(2), 250-267.