Village Company is accounting for a long term construction contract where revenue is recognized over time. The project is built to the customer’s specifications, and the customer can make changes as construction is ongoing. It is a 3 year, fixed fee contract that is presently in its first year. The latest reasonable estimates of total contract costs indicate that the contract will be completed at a profit. Village will submit progress billings to the customer and has reasonable assurance that collections on these billings will be received in each year of the contract. The contract can be cancelled at any time by the customer who will retain control of any work done to date.
Required:
1. When should revenue from contracts be accounted for over time versus at a point in time?
2. What facts in the preceding situation indicate that Village should account for this long term construction contract over time?
3. How would the income recognized in each year of this long term construction contract be determined using the cost to cost method of determining progress toward satisfaction of the performance obligation?
4. What is the effect on income, if any, of the progress billings and the collections on these billings?