USE GAAP CODIFICATION (CITATION)

ABC Construction (ABC or the “Company”), an SEC registrant, is aconstruction company that manufactures commercial and residentialbuildings. On March 1, 2018, the Company entered into an agreementwith a customer, Village Apartments, to construct a residentialapartment building for a fixed price of $1.5 million. The Companyestimates that it will incur costs of $1 million to completeconstruction of the apartment building. The apartment building willonly transfer to Village Apartments once the construction of theentire building is complete. In addition, Village Apartments hasvarious design requirements that would require ABC to incursignificant costs to rework the building prior to selling it to acustomer other than Village Apartments.

To construct the apartment building, ABC acquires standardmaterials that it regularly uses in construction contracts for bothresidential and commercial buildings. These materials are used tomanufacture generic component parts for inclusion in VillageApartments’ residential buildings. These standard materials remaininterchangeable with other items until they are deployed in aVillage Apartments building. The Company has made the followingpurchases and incurred the following costs throughout theconstruction progress:

• As of June 30, 2018, in total, ABC has purchased $75,000 ofcomponent parts. As of June 30, 2018, $25,000 of component partsremain in inventory and $50,000 have been integrated into theproject. Further, ABC has incurred $12,500 of direct costs tointegrate the component parts into the Village Apartmentsconstruction project during the three months ended June 30,2018.

• During the three months ended September 30, 2018, ABCpurchased an additional $500,000 of component parts ($575,000 intotal). Of the $575,000 of component parts, $325,000 remain ininventory and $200,000 have been integrated into the project duringthe three months ended September 30, 2018. During the three monthsended September 30, 2018, ABC incurred an additional $50,000 ofdirect costs to integrate the component parts into the VillageApartments construction project.

• As of September 30, 2018, ABC determined that the project wasover budget and revised its cost estimate from $1 million to $1.25million.

• As of December 3, 2018, the construction project wascompleted. During the three months ended December 31, 2018, ABCpurchased an additional $425,000 of generic component parts ($1million in total). Of the $1 million component parts, $0 remain ininventory and $750,000 were integrated into the project during thethree months ended December 31, 2018. ABC has incurred $187,500 ofdirect costs to integrate the component parts into the VillageApartments construction project during the three months endedDecember 31, 2018.

If Village Apartments cancels the contract, ABC will be entitledto reimbursement for costs incurred for work completed to date plusa margin of 20 percent, which is considered to be a reasonablemargin. ABC will not be reimbursed for any materials that have beenpurchased for use in the contract but have not yet been used andare still controlled by ABC.

Required:

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

2. How should the entity recognize revenue for the satisfactionof its performance obligation? What amount of revenue should berecognized for the following periods:

2a. The three months ended June 30, 2018?

2b. The three months ended September 30, 2018?

2c. The three months ended December 31, 2018?