Question

Estate Construction is constructing a building for CyberB, an online retailing company. Under the construction agreement, if for any reason Estate can't complete construction, CyberB would own the partially completed building and could hire another construction company to complete the job.

When should Estate recognize revenue: as the building is constructed, or after construction is completed?

Answer 1

Estate Construction should recognize revenue for the building project after construction is completed, following the Generally Accepted Accounting Principles (GAAP).

Step-by-step explanation:

Estate Construction should recognize revenue for the building project after construction is completed. This is because revenue recognition typically occurs when the seller has transferred control of the goods or services to the buyer. In this case, control of the building would be transferred to CyberB upon completion of construction.

Additionally, the construction agreement states that if Estate can't complete construction, CyberB would own the partially completed building and could hire another construction company to complete the job. This means that Estate's obligation to complete the construction is contingent on their ability to do so, and therefore, revenue recognition should wait until the construction is fully completed.

In accordance with the Generally Accepted Accounting Principles (GAAP), which provide guidance on revenue recognition, it is important for Estate Construction to follow these principles to ensure accurate financial reporting and transparency.