ASC 606 PRACTICE Required: Briefly go over the 5 steps of the ASC606 Revenue Recognition using the situation below and indicate which step includes an issue (and what that issue is) that needs to be adjusted 1. Contract with Customer 2. Performance Obligations 3. Transaction Price 4. Allocation 5. Revenue Recognition some information may not be relevant. Hammers and Roses Construction (Hammers and Roses or "HNR") is a construction company that builds commercial and residential buildings. On April , 2019, HNR will enter into a contract with a customer, Borough Apartments, to construct a residential apartment building for a cash price of $15 million. HNR estimates that it will incur costs of $10 million to complete construction of the apartment building. The apartment building will only transfer to Borough Apartments once the construction of the entire building is complete. Borough Apartments has various design requirements that would require HNR to incur significant costs to rework the building before selling it to a customer other than Borough Apartments. If Borough Apartments cancels the contract, HNR 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. Hammers and Roses 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 HNR. To construct the apartment building, HNR acquires standard materials that it regularly uses in its other construction projects for both residential and commercial buildings. These materials are used to manufacture generic component parts for inclusion in Borough Apartments' residential buildings. These standard materials remain interchangeable with other items and can be used by HNR for other projects until they are deployed in the Borough Apartments building. The cost of the installed components is included in the $10 million construction cost estimate The contract calls for four payments of S3,750,000. The $3.75 million payments are due orn the date the contract is signed (April 1, 2019), July 1, 2019, October 1, 2019, and when the building is complete and transferred to Borough Apartments. In addition to the $15 million in cash, there is a $1 million per month bonus if construction is completed before February 2020 and a $1 million penalty per month if the construction is completed after February 29, 2020. Any completion bonus would increase, and any penalty reduces the balance due upon completion. Hammers and Roses has a large number of contracts with completion bonuses or penalty clauses similar to the contract with Borough. The schedule below shows the potential completion bonus or penalty and HNR's assessment of the likelihood of each scenario occurring. While no specific outcome is probable, HNR management's assessment of the likelihood of completing the construction in the specified time frame is based on significant historical experience with similar building projects. Likelihood Bonus $3,000,000* Penalty Prior to December 2019 0% ASC 606 PRACTICE Required: Briefly go over the 5 steps of the ASC606 Revenue Recognition using the situation below and indicate which step includes an issue (and what that issue is) that needs to be adjusted 1. Contract with Customer 2. Performance Obligations 3. Transaction Price 4. Allocation 5. Revenue Recognition some information may not be relevant. Hammers and Roses Construction (Hammers and Roses or "HNR") is a construction company that builds commercial and residential buildings. On April , 2019, HNR will enter into a contract with a customer, Borough Apartments, to construct a residential apartment building for a cash price of $15 million. HNR estimates that it will incur costs of $10 million to complete construction of the apartment building. The apartment building will only transfer to Borough Apartments once the construction of the entire building is complete. Borough Apartments has various design requirements that would require HNR to incur significant costs to rework the building before selling it to a customer other than Borough Apartments. If Borough Apartments cancels the contract, HNR 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. Hammers and Roses 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 HNR. To construct the apartment building, HNR acquires standard materials that it regularly uses in its other construction projects for both residential and commercial buildings. These materials are used to manufacture generic component parts for inclusion in Borough Apartments' residential buildings. These standard materials remain interchangeable with other items and can be used by HNR for other projects until they are deployed in the Borough Apartments building. The cost of the installed components is included in the $10 million construction cost estimate The contract calls for four payments of S3,750,000. The $3.75 million payments are due orn the date the contract is signed (April 1, 2019), July 1, 2019, October 1, 2019, and when the building is complete and transferred to Borough Apartments. In addition to the $15 million in cash, there is a $1 million per month bonus if construction is completed before February 2020 and a $1 million penalty per month if the construction is completed after February 29, 2020. Any completion bonus would increase, and any penalty reduces the balance due upon completion. Hammers and Roses has a large number of contracts with completion bonuses or penalty clauses similar to the contract with Borough. The schedule below shows the potential completion bonus or penalty and HNR's assessment of the likelihood of each scenario occurring. While no specific outcome is probable, HNR management's assessment of the likelihood of completing the construction in the specified time frame is based on significant historical experience with similar building projects. Likelihood Bonus $3,000,000* Penalty Prior to December 2019 0%