On January 2, 20X0, Kowalski Construction Company signed a contract to provide paved roads to a new housing development.

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On January 2, 20X0, Kowalski Construction Company signed a
contract to provide paved roads to a new housing development. The
project will last 2 years, and the total payment will be $4
million, to be paid at completion of the project. Kowalski’s
budgeted cost for the project is $3 million. Work will progress
evenly over the 2 years. On December 31, 20X0,
Kowalski’s accountant asks you what revenue should be recorded
for 20X0. Costs of $1.5 million were incurred during 20X0.
Suppose Kowalski uses the percentage of completion method. What
revenue should be recorded for 20X0? What profit is recognized in
20X0?
Suppose Kowalski uses the completed contract method. What
revenue should be recorded for 20X0? What profit is recognized in
20X0?
Assume that the contract was with a large corporation that is
very stable. Under current U.S. GAAP, which method should Kowalski
use?
Assume that the contract is with a small developer and the
economy has taken a downturn during 20X0, making payment of the
final contract price highly uncertain. However, Kowalski Company
still believes it will receive payment and continues working on the
project. Under current U.S. GAAP, which method should Kowalski
use?