Check your answer
Write your response and explain your reasoning.
Fictional Summit Enclosures is fabricating a custom unit. The contract prevents Summit from redirecting the unit during production, and another customer could not use it without substantial rework. Counsel concludes that applicable law and the contract give Summit an enforceable right to payment for performance completed to date, including a reasonable margin, if the customer terminates for a reason other than Summit's failure to perform. The customer neither receives and consumes the enclosure during fabrication nor controls the work in process.
The allocated price is $600,000. The supplied cost-to-cost method faithfully depicts transfer after excluding inputs that do not depict performance. Expected eligible cost is $480,000, eligible cost incurred to date is $192,000, and cumulative revenue recognized before this period is $210,000. A separate $96,000 uninstalled material has no procurement margin. The facts do not state when the customer controls that material or whether the conditions for an equal-to-cost adjustment are met. Do not include it in the eligible-cost ratio.
Identify which over-time path is supported and why the other two are not. Calculate cumulative progress, cumulative revenue, current-period revenue, and remaining allocated revenue. Explain how to treat the uninstalled material and what changes if the enforceable right-to-payment conclusion is absent. Compare your work with the answer only after completing the memo and calculation.
Use ASC 606-10-25-27 and 25-29 for the over-time path. The measurement objective and consistency rule are in 25-31 and 25-32. Input methods and inputs that do not depict performance are addressed in 55-20 through 55-21.
Compare your reasoning with the worked answer
The custom enclosure has no alternative use because the contract restricts redirection and another customer cannot use it without substantial rework. The supplied legal conclusion also gives the seller an enforceable right to payment for performance completed to date, including a reasonable margin, if the customer terminates for a reason other than seller nonperformance. Those two facts support the third over-time path. The first path is not supported because the customer does not receive or consume the enclosure as it is fabricated. The second is not supported because the facts do not say the customer controls the work in process.
Under the supplied faithful cost-to-cost method, eligible progress is 40 percent: $192,000 divided by $480,000. Cumulative revenue is $240,000: $600,000 multiplied by 40 percent. Current-period revenue is $30,000 after subtracting the $210,000 recognized before this period. The remaining allocated revenue is $360,000.
Do not add the $96,000 uninstalled material to either eligible-cost amount. The facts do not establish when its control transfers or whether the conditions for an equal-to-cost adjustment are met. It needs a separate analysis. Its cost does not prove an over-time criterion or an enforceable payment right.
If the enforceable right to payment were absent, the third path would fail even though the enclosure had no alternative use. The entity would test the other over-time paths. If neither applied, it would use the point-in-time model; it would not keep the 40 percent revenue result merely because the arithmetic was available.