Crafting a Revenue Recognition Strategy

As we dive into the fascinating concept of long$-$term construction contracts and their financial aspects, consider the situation of Drenkow Company.

This scenario is an opportunity for you to grasp and analyze how companies account for revenues over time in long$-$term contracts. Reflect on the factors that influence this accounting method and how it impacts the organization's income and financial reporting.

You've recently been hired as a junior accountant at Drenkow Company. One of your first tasks is to understand our accounting strategy for long$-$term construction contracts, especially those where revenue is recognized over time. One such project is currently in its first year. The project is unique because it is built to the customer's specifications and is subject to alterations as construction is ongoing.

In this task, we want you to understand various aspects of this business scenario and apply your knowledge to determine the best revenue recognition strategy for Drenkow Company.

$**$Task$**$

$1.$ Create a step$-$by$-$step guide on when to account revenue from contracts either over time or at a point in time. Use relevant key points and examples for better comprehension.

$2.$ Analyze the given business situation. Identify and list the factors that suggest Drenkow Company should account for this long$-$term construction contract over the course of time.

$3.$ Develop a guide on how to determine the income recognized in each year of this long$-$term construction contract using the cost$-$to$-$cost method for determining progress toward satisfying the performance obligation.

$4.$ Discuss the effect of progress billings and collections on these billings on the company's income.