Question

Football Contractors, INc., which reports under US GAAP, has contracted to build a stadium for the City of Washburn. The contract price is $100 million and costs are estimated at $60 million. Costs are not assured, however, because there is a material risk, which Football Contractors has assumed, that ground water problems might slow construction and increase costs by as much as $40 million. In 2004, the first year of the agreement, Football Contractors, Inc. billed $30 million, received $20 million payment, and incurred $15 million in costs. For 2004 Football Contractors, INc. should recognize revenue from the CIty of WAshburn transaction in the amount of:

A) $0.
B) $30 million.
C) $20 million.

Answer 1

A) $0.

Step-by-step explanation:

Under the US GAAP, when there are uncertainties surrounding costs and cannot be estimated reliably, the completed contract method would be applied.

Completed contract method means that no revenue would be recognized on the contract until contract completion, in other words, Football Contractors, Inc. should not recognize any revenue e from the CIty of Washburn transaction in the year 2004.

In short, the correct option is A with $0 revenue in the year 2004.

Answer 2

The answer is A. $0

Step-by-step explanation:

It is stated in the question that the total costs to completely deliver this contract has not been clearly defined due to uncertainty in ground water problem.

Thus, the method should be applied under US GAAP in this situation is complete contract method which indicates that No revenue should be recorded until the contract is completed and the total cost to deliver contract is defined.

Thus, in 2004, the revenue from contract is not recorded at all which gives us the answer to be A. $0