Question:

XYZ Corporation, a manufacturing company, is preparing its financial statements for the fiscal year ending December 31, 20X3. The company has encountered several accounting issues during the year that require your expertise to address.

Part A: Revenue Recognition

During the year, XYZ Corporation entered into a long-term contract to deliver customized machinery to a client. The contract spans multiple years and involves complex specifications. As of December 31, 20X3, the company has partially completed the project and needs to determine the appropriate method for recognizing revenue. Explain the revenue recognition criteria according to the Generally Accepted Accounting Principles (GAAP) that XYZ Corporation should consider in recognizing revenue for this long-term contract. Additionally, provide journal entries for recognizing revenue based on the percentage-of-completion method, assuming XYZ Corporation has determined that it is the most appropriate method for this contract.

Part B: Contingent Liabilities

During the year, XYZ Corporation became involved in a legal dispute related to environmental damage caused by one of its manufacturing plants. The outcome of the lawsuit is uncertain, and a potential loss is probable. The company is uncertain about the amount of the loss but estimates it could range from $1 million to $3 million. Explain how XYZ Corporation should account for this contingent liability according to the accounting standards. Provide journal entries, if necessary, to reflect the contingent liability in the financial statements as of December 31, 20X3. Additionally, discuss the disclosure requirements related to contingent liabilities in the financial statements.

This question delves into revenue recognition criteria and contingent liabilities, two crucial topics in accounting. Candidates are expected to demonstrate their understanding of relevant accounting principles, provide appropriate explanations, and apply the knowledge to specific scenarios.