Chapter 4 discussed adjusting entries for accruals and deferrals using accrual accounting. For this discussion, you will be divided into two sides to debate an issue involving the appropriate timing to report revenue under accrual accounting. Although many facts are outlined below, additional information may be helpful in arguing the case for your client.

Facts

Damian Company operates a construction company. On January 1, 2021, Damian Company negotiates a new contract with Horton Hockey Association and agrees to construct a large complex for the hockey association in four phases over a 12-month period at a total cost of $1,600,000. The complex will not be usable until all construction is complete.

On January 1, 2021, Horton pays Damian a refundable deposit of $100,000 and agrees to four installment payments of $375,000. The installment payments are due on March 31, 2021, June 30, 2021, September 30, 2021, and December 31, 2021.

Under the contract terms, Horton has the option of ending the contract if the association is dissatisfied with the construction. To terminate the contract, the hockey association must notify Damian Company before June 30, 2021. If the hockey association decides to terminate the contract, the association will receive the January 1, 2021, refundable deposit of $100,000.

If the hockey association provides a timely notice of its intent to terminate the contract, Damian Company may also reimburse Hortons March 31, 2021, installment payment if Damian Company finds a suitable bidder who agrees to the installment terms outlined in the original contract.

Step 1

All students will respond to this prompt, but you will take a different position based on your surname (see position assignments below)

When should Damian Company record revenue? List the amount of revenue that should be recorded at the appropriate date. Also, explain your rationale using principles of accrual accounting. What additional information would be helpful in arguing your clients case? Explain.

Position Assignments

Students with a surname that begins with A through L represent the Taxing Authority.

Present a persuasive argument for your client, the taxing authority. The taxing authoritys objective is to have Damian Company record revenue as soon as possible based on the revenue recognition principle of accrual accounting.