ACTG 4650

Assignment 7

Due April 16

Answer the questions associated with each of the followingscenarios.  The companies in each scenario are publiclytraded, have a calendar year and entered into the agreements in2018.

1.         CompanyA entered into a two-year contract with a customer to maintainthe    customer’s fleet of deliveryvehicles.  Company A receives payments fromthe            customerat regularly scheduled intervals during the contract andprovides             monthlymaintenance services needed to keep the vehicles in workingorder.       How should CompanyA recognize revenue on this contract? What isthe         justificationfor your answer?

2.         Company Benters into a contract to manufacture equipment for acustomer.  The equipment is manufactured at Company B’splant and is under Company B’s control while it is beingbuilt.  The customer makes a 20% deposit at the inceptionof the contract.  Periodic payments from the customerover the life of the contract equal an additional 30% of thecontract price.  The remaining 50% of the contract priceis due upon   delivery of the equipment. Company Bexpects the customer to make all required payments. If the customerterminates the contract, Company B is entitled to keep all amountsreceived but has no claim for furtherpayments.   How should Company B recognize revenueon this contract? What is the justification for your answer?

3.         CompanyC enters into a contract to build a building for acustomer.  The             contractprice is $3,000,000 and contains incentive bonuses of $25,000for    eachweek the building is completed priorto the target date forcompletion.  There      arealso $25,000 penalties for each week work goes on beyond the targetdate.     The customer is a governmentalentity which is required to get all newbuildings            inspectedprior to taking possession. The contract contains a $50,000 bonusifthe             buildingpasses the initial inspection.  Explain how Company Cshould determine     the transaction priceassociated with this contract.

4.         CompanyD enters into a contract with a customer to sell Products W, Z, Y,andZ             fora price of $150,000.  None of these products are soldtogether insmaller        bundles.Company D regularly sells product W for $40,000 and Product Xfor          $50,000.  CompanyD is aware that other companies sell Product Y for$20,000.         ProductZ is a new product and there are no other companies sellingthis          product.  CompanyD knows that Product Z costs them $40,000 to produce and theirnormal markup on other similar products is 25% ofcost.  Howshould           CompanyD allocate the transaction price to the performance obligations ofthis      contract? What isthejustification for your answer?