XM, Ltd. was a small engineering firm that built high-tech robotic devices for electronics manufacturers. One very complex device was partially completed at the end of 2015. Barb McLauren, head engineer, knew the experimental technology was a failure and XM would not be able to complete the $20,000,000 contract next year. However, the corporation was getting ready to be sold in January. She told the controller that the device was 80% complete at year-end and on track for successful completion the following spring; the controller accrued 80% of the contract revenue at 12/31/15. McLauren sold the company in Jan 2016 & retired. By mid-year, it became apparent that XM would not be able to complete the project successfully & the new owner would never recoup his investment.

1. For complex, high-tech contracts, how does a company determine the percentage of completion & the amount of revenue to accrue?

2. What action do you think was taken by XM in 2016 with regard to the revenue that had been accrued the previous year?