The Northern Company (NC), a major public utility, has awarded a $500m contract to Universal Electric (UE) to build and maintain a liquid sodium nuclear plant. Construction of the project will take 4 years to complete. The 5-year maintenance portion of the agreement begins upon transfer of ownership and control of the plant to NC. This will occur upon completion and certification of the plant for operation. NC will operate the plant, but UE will be responsible for repairs and replacement and disposal of fuel rods.

If UE completes the project in 3 years or less, NC will pay UE a bonus of $100m. UE estimates that there is a 90% chance that it will be able to complete the project in less than 3 years and will incur costs totaling $150m in each of the 3 years.

If NC or a regulatory agency were to cancel or terminate the contract before completion, UE will be legally entitled to receive payment for work completed up to termination. The plant would be useless and would be abandoned.

If UE were to contract for construction of such a plant alone, it would charge $500m. It would also charge $100m for a 5-year maintenance contract for such a plant.

REQUIRED

[NUMBER AND BEGIN EACH RESPONSE ON A NEW LINE]

1. Identify the performance obligations.
2. Should UE recognize revenue for the plant construction at a point in time or over time? Explain with cites to the ASC.

If your answer is 'over time', explain whether UE accounts for revenue on the input or output method.

How and when should UE account for the maintenance revenue?

4. Given the case facts, how should UE account for the possible $100m bonus? Explain, providing appropriate ASC cites.

5. Calculate the amount of revenue to be recognized for each performance obligation over the entire contract

6.Calculate the amount of revenue to be recognized for each performance obligation in the first year. If needed, assume that UE expects to complete the project in 3 years and incurs $150m in construction costs in the first year, out of an estimated total cost of $450m