Question:
Willingham Construction is in the business of building high-priced, custom, single-family homes. The
company, headquartered in Anaheim, California, operates throughout the Southern California area. The
construction period for the average home built by Willingham is six months, although some homes have
taken as long as nine months.
You have just been hired by Willingham as the assistant controller and one of your first tasks is to
evaluate the company’s revenue recognition policy. The company presently uses the completed contract
method for all of its projects and management is now considering a switch to the percentage-of-
completion method.
Required:
Write a 1- to 2-page memo to Virginia Reynolds, company controller, describing the differences between
the percentage-of-completion and completed contract methods. Be sure to include references to GAAP as
they pertain to the choice of method. Do not address the differential effects on income taxes nor the effect
on the financial statements of switching between methods.
Answer:
Suggested Grading Concepts and Grading Scheme:
Content (70%)
_________ 45 Income differences.
________ Percentage-of-completion recognizes gross profit during construction
based on an estimate of percent complete.
________ The completed contract method recognizes no gross profit until
project completion.
________ For both methods, estimated losses are fully recognized in the first
period
Willingham Construction is in the business of building high-priced, custom, single-family homes. The
company, headquartered in Anaheim, California, operates throughout the Southern California area. The
construction period for the average home built by Willingham is six months, although some homes have
taken as long as nine months.
You have just been hired by Willingham as the assistant controller and one of your first tasks is to
evaluate the company’s revenue recognition policy. The company presently uses the completed contract
method for all of its projects and management is now considering a switch to the percentage-of-
completion method.
Required:
Write a 1- to 2-page memo to Virginia Reynolds, company controller, describing the differences between
the percentage-of-completion and completed contract methods. Be sure to include references to GAAP as
they pertain to the choice of method. Do not address the differential effects on income taxes nor the effect
on the financial statements of switching between methods.
Answer:
Suggested Grading Concepts and Grading Scheme:
Content (70%)
_________ 45 Income differences.
________ Percentage-of-completion recognizes gross profit during construction
based on an estimate of percent complete.
________ The completed contract method recognizes no gross profit until
project completion.
________ For both methods, estimated losses are fully recognized in the first
period
