Superstar Inc. had a $50M contract to complete a sophisticated software program that would aid in the discovery and extraction of gold. By the end of 2020, 80% of the program was completed, but Bob McIntyre, Sr. SoftwareEngineer and head of the project knew that the program would never be completed in 2021. He discovered, by accident, that his Sr. Programmer and project creator (who had been working remotely since the beginning of the pandemic) had been given a few months to live back in June.

However, the company was getting ready to be sold in January, and he told the Controller that the software was 80% complete and on track for successful completion the following year. The Controller accrued 80% of the contract revenue at December 31, 2020.

Superstar Inc. was sold in January 2021 and Bob McIntyre and the rest of the Executives in the firm retired. The Sr. Programmer passed away shortly after the start of the year. By the middle of 2021, it was apparent that the company would not be able to complete the project successfully and the new owner would never recover his investment.

1. What was the consequence to the company (must explain it in accounting terms) of accruing 80% revenue on the contract in 2020?

2. What action do you think was taken in 2021 by the new Controller with regard to the revenue that had been accrued the previous year?

3. What exactly was the problem here? Was this an accounting problem?

4. Could a good foundation in accounting principles had helped the new owner to avoid this disaster?