Question
Chicago High School announced on February 1 st , 2019 that they will be building new football and baseball stadiums. Chicago High School hired Stadium
Chicago High School announced on February 1st, 2019 that they will be building new football and baseball stadiums. Chicago High School hired Stadium Construction Corp. (SCC) to build both stadiums. The football stadium will be located at the north end of the school and the baseball stadium will be located at the south end of the school. The agreement stipulates the following: Pricing for the football and the baseball stadium will be $6,000,000. The project for the new stadiums will consist of demolition of existing stadiums and construction of the new stadiums (which includes fields, bleachers, scoreboards, locker rooms, and a snack bar for the fans). The agreement also offers a completion incentive/penalty. (see table below). The agreement also states that if the football stadium receives a safety inspection rating from government inspectors that is above 95 points SCC will receive a performance bonus of $500,000. Based upon their past experience with safety inspections SCC estimates they are 80% likely to earn the inspection bonus.
The completion schedule for both stadiums is estimated as follows:
Expected Completion Date | Probability | Bonus/(Penalty) |
August 1st, 2019 | 60% | $400,000 |
August 10th , 2019 | 25% | $250,000 |
August 15th, 2019 | 10% | $0 |
After August 15th, 2019 | 5% | ($50,000) |
Chicago High School could have hired other contractors to build each stadium but has elected to have SCC build both stadiums. The stand alone pricing for the football stadium is $5,000,000 and the standalone pricing for the baseball stadium is $2,500,000.
Chicago High School has excellent credit and both parties signed the agreement stipulating the payment terms and that SSC will build the stadiums. SSC has significant experience in the industry and does not expect a revenue reversal to occur.
SSCs 2
pricing includes a 12 month warranty on all the scoreboards. Chicago High School also elects to purchase a 5 year extended warranty for $200,000 (covers both scoreboards). The standalone pricing of an extended warranty is $300,000.
The total payment for the project is due on October 1st, 2020. Interest rates on comparable projects are 6% and is equal to $360,000. SSCs fiscal year is January 1-December 31 and is privately held.
Required:
- Apply the requirements of revenue from contracts with customers. Make sure you apply the detailed guidance from the codification.
- For each of the five steps:
Describe how the revenue model applies to this transaction. If any step is not applicable simply indicate that it is not applicable. Clearly label all of your work.
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