Case Facts

On July 1, 2019, ABC Contracting Inc. (the Company) signed a contract to construct a 6,000 square foot commercial building for its owner, DEF Realty Inc. for a fixed price of $ 6,000,000. The construction of the building is estimated to last 24 months. At the inception of the contract, the company estimated a total project construction cost of $5,400,000, resulting in an estimated gross profit amount of $600,000. This estimate did not change during 2019.

Additional facts:

1. ABC Contracting Inc. began the construction of the building on July 14, 2019, and satisfactorily completed the building on July 15, 2021.
2. On August 20, 2020, there was an approved change order for $50,000 for an upgrade of some kitchen parts. This change order was was completed in 2020.
3. On September 29, 2020, the owner requested an upgrade for a number of items in the bathroom. The scope of the work was agreed upon, but the price of this additional work was not settled. The cost to the company for this unapproved change order was $100,000.

The following represents previous historical price adjustments with DEF Realty with respect to unapproved change orders:

Historical experience: Unapproved change orders

Amount collected Probability

Nothing 40%

Cost 30%

Cost plus 25% 30%

Total 100%

4. Table 1 below provides the relevant cost data of the project.

TABLE 1: ABC Contracting Inc.

Cost-Input Data

(In US $)

2019 2020 2021 Totals

Construction costs incurred during the year 1,200,000 3,000,000 700,000 4,900,000

Estimated costs to complete the project 4,200,000 565.000. 0

Required Questions

1- Is the approved change order considered a separate performance obligation or a modification to the original performance obligation? (STEP 2 OF REVENUE RECOGNITION PROCESS -from fact 2 above)

2. What is the effect of the unapproved change order on the transactions price in 2020 under the following situations? (STEP 3 REVENUE RECOGNITION PROCESS -from fact 3 above)

3. 3-Compute the revenue recognized for calendar periods 2019 and 2020 assuming revenue is earned under the percentage of completion method? (STEP 5 REVENUE RECOGNITION PROCESS)