Requirement 3

(a) For the illustrative Contracts X and Y described in the case, compute the percentage of completion, construction revenues, expenses, and gross profit (or loss) for each year, and balances in the construction in progress (net of partial billings and provision for loss, if any) and accounts receivable in the balance sheet at the end of each year.

You should present the numbers according to (1) how you think Toshiba accounted for these contracts, and (2) how Toshiba should have recorded the contracts to comply with U.S. GAAP. Present your answers using the format provided by Table 1 (Panel A for Contract X, and Panel B for Contract Y).18 All the amounts should be in millions of yen (). (Hint: It might be helpful to prepare journal entries for each contract separately before completing the table.)

(b) For Contract Y, calculate the loss, if any, that Toshiba should record at the inception of the contract to be compliant with U.S. GAAP. Explain your rationale and cite authoritative pronouncements.

(c) For Contract Y, do you agree with the rationale of Toshibas management to not change the original cost estimate? Is Toshibas accounting treatment consistent with the provisions of U.S. GAAP? Cite authoritative pronouncements.

Contract Y was accepted by Toshiba at the beginning of fiscal 2012 for Y1,336.13 million. Although the cost estimate at that time was 1,402.94 million and the contract was expected to incur a loss, Toshiba accepted the contract for competitive reasons. However, Toshiba did not record a provision for loss at the inception of the contract, relying on the assumption that future cost savings could be identified so that the total costs would not exceed the contract revenue of Y1,336.13million. As Contract Y progressed, the costs and cost estimates increased (see table below) and eventually, the total costs rose to 1,510.81 million, but Toshiba continued to account for the contract based on the initial cost estimate of 1,336.13 million. Management's rationale for this position was that it lacked reliable forecasts because its efforts to seek contract price increases and additional cost savings were under way. In 2014, when the final cost data confirmed the costs to be 1,510.81 million, 14 When questioned about this matter, Tanaka stated that the need for a provision for loss on this contract had been discussed between the General Managers of the SIS Company Firnanee \& Acoounting Division and the Corporale Finanee \& Aecoumting Division, and since they had confirmed that there were no accounting issues of note, he paid litle attention to whether there was any problem with respect to the actual timing of recording a prevision for eontract losses. 15 Cost reduction initiatives classified as rank A were those tha could be reliably implemenled, rank B and C had a relatively high degret of aceuracy, and rank D required significant efforts to be realized. 16 This view was shared by CEO Taraka and the rank and file of Toshiba employees. (Imvestigaion Report, page 17I) 17 Although the amounts and financial details of these contracts are hypohetical, they resemble several projocts described in the investigation report. Issues in Accounting Edwcation Volume 33, Number 3, 2018 Toshiba's Creafive Accounting for Construction Confracts 125 Toshiba recorded a loss on the contract of 174.68 million (revenues of 1,336.13 million minus expenses of 1,510.81 million)