Question

Case 18-3 rev. Nailed It! Construction Nailed It! Construction (Nailed It! or the “Company"), an SEC registrant, is a construction company that manufactures commercial and residential buildings. On March 1, 20X1, the Company entered into an agreement with a customer, Village Apartments, to construct a residential apartment building for a fixed price of $1.5 million. The Company estimates that it will incur costs of $1 million to complete construction of the apartment building. The apartment building will only transfer to Village Apartments once the construction of the entire building is complete. In addition, Village Apartments has various design requirements that would require Nailed It! to incur significant costs to rework the building prior to selling it to a customer other than Village Apartments. To construct the apartment building, Nailed It! acquires standard materials that it regularly uses in construction contracts for both residential and commercial buildings. These materials are used to manufacture generic component parts for inclusion in Village Apartments' residential buildings. These standard materials Temain interchangeable with other items until they are deployed in a Village Apartments building. The Company has made the following purchases and incurred the following costs throughout the construction progress: As of June 30, 20X1, in total, Nailed It! has purchased $75,000 of component parts. As of June 30, 20X1, $25,000 of component parts remain in inventory and $50,000 have been integrated into the project. Further, Nailed It! has incurred $12,500 of direct costs to integrate the component parts into the Village.

Answer 1

1. As far as the construction contracts are concerned they are usually long term contacts therefore it is prudent to record the revenue on timely basis rather than recording it in one go. It is prudent to allocate the revenue on the basis of some criteria over the period of time considering the percentage of work completed. In case of Nailed it as it seems to be a construction contract whose performance can be analysed at quarterly intervals therefore it is wise to record the revenues, costs and profits over the period of time rather than recording it at one go so that the fluctuation in the costs and prices can be accounted for. Also it is advantageous for nailed it to record revenue over time so that it can accept payment for work done on work completed to date basis periodically.

2. A. Input Method is used to measure the progress.

B. There are two methods of recognizing revenue by measuring progress of completion of contracts:

One is Output method where the progress of the contract is measured by measuring the value transferred to customers. Whereas in Input Method the progress of a contract is measured by the value of materials consumed and the efforts utilized in carrying on the contract work.

In case of Nailed it since the performance of the contract is measured by valuing the components used in the construction and the direct expenses incurred on the project. Therefore, Nailed it is following the Input Method.

3. Keeping in mind the trend of past two quarters, quarter ending June 30,20X1 and September 30, 20X1 it is clearly visible that there are further additional direct costs that are being incurred to integrate the component parts into the village other than the purchase cost of components which will also be incurred in future and will increase the overall project cost. Therfore, Nailed it decided to revise its cost estimate from previous figure of $1 million to $1.25 million.

4. Calculations for revenue to be recognized in each of the 3- Month period:

Fixed price: $	1500000
As of	Cost Incurred
	Purchases	Direct Costs	Total cost	Percentage of completion	Quarterly Revenue Recognised
	A	B	C=A+B
30.06.2021	75,000	12,500	87,500	87500/1250000*100	7%	105,000
30.09.2021	500,000	50,000	550,000	550000/1250000*100	44%	660,000
31.12.2021	425,000	187,500	612,500	612500/1250000*100	49%	735,000
			1,250,000			1,500,000