AD Construction, a property developer, is building a property complex consisting of 50 apartments. Apartments are similar in size and proportion - however, can be adapted to suit client needs. AD Construction enters into a contract with customer B. The client wants to buy an apartment and agrees to a total price of CU100,000 per apartment. The payment schedule is as follows: After signing the contract, clients pay a deposit of CU 10,000 each. Milestone: 1 year before the planned completion, AD Construction will send a progress report to the client and the client will have to pay CU 50,000 each. Completion: After construction is completed, the legal ownership of the apartment is transferred to the client and they pay the remaining amount of CU40,000 each. The assumed construction period is 2 years from the contract date. AD Construction has the right to withhold payment from any client in the event that that client fails to pay for the contract prior to its completion. The contract terms further clarify that AD Construction cannot transfer or direct the apartment to another client and instead, client B cannot terminate the contract. If client B defaults on the contract before its completion (in other words, does not make payments according to schedule), AD Construction has the right to all contract prices if AD Construction decides to complete the contract. Based on the above case, how is the revenue recognition of the contract between AD Construction and client B, whether one time or all of the time?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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AD Construction, a property developer, is building a property complex consisting of 50 apartments. Apartments are similar in size and proportion - however, can be adapted to suit client needs. AD Construction enters into a contract with customer B. The client wants to buy an apartment and agrees to a total price of CU100,000 per apartment. The payment schedule is as follows:

After signing the contract, clients pay a deposit of CU 10,000 each.
Milestone: 1 year before the planned completion, AD Construction will send a progress report to the client and the client will have to pay CU 50,000 each.
Completion: After construction is completed, the legal ownership of the apartment is transferred to the client and they pay the remaining amount of CU40,000 each.

The assumed construction period is 2 years from the contract date. AD Construction has the right to withhold payment from any client in the event that that client fails to pay for the contract prior to its completion. The contract terms further clarify that AD Construction cannot transfer or direct the apartment to another client and instead, client B cannot terminate the contract. If client B defaults on the contract before its completion (in other words, does not make payments according to schedule), AD Construction has the right to all contract prices if AD Construction decides to complete the contract.

Based on the above case, how is the revenue recognition of the contract between AD Construction and client B, whether one time or all of the time?

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