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INTERMEDIATE (FINANCIAL) ACCOUNTING I SUBCLASS KLM CASE ANALYSIS QUESTIONS CASE 1 – REVENUE RECOGNITION AND EARNINGS MANAGEMENT

INTERMEDIATE (FINANCIAL) ACCOUNTING I SUBCLASS KLM CASE ANALYSIS QUESTIONS CASE 2 – REVENUE RECOGNITION FOR A CONSTRUCTION PROJECT HKU Technology Inc. (Hereafter, HKU Tech) is a large construction contracting firm that serves a variety of industrial customers that purchase machinery and equipment from HKU Tech. HKU Tech’s business primarily involves the design and manufacture of large, industrial machinery and tooling that is used by its customers in manufacturing parts and components for fighter jets, transport planes, and other aerospace-related machinery and equipment. All of HKU Tech’s construction contracts involve the design, development, and manufacture of machines that are unique and customized to the specifications of its customers. HKU Tech negotiates all its contracts with its customers on either a fixed-price or cost-plus basis. HKU Tech has developed an accounting policy to recognize revenue related to its customized construction contracts, which is outlined as follows: The Company performs under a variety of contracts, some of which provide for reimbursement of cost plus fees, and others that are fixed-price-type contracts. Revenues and fees on these contracts are primarily recognized on a contract-by-contract basis using the percentage-ofcompletion method of accounting, which is most often based on contract costs incurred to date compared with total estimated costs at completion (cost-to-cost method). The cost recovery method of accounting is used in instances in which reliably dependable estimates of the total costs to be incurred under a specific contract cannot be made. HKU Tech has entered into a contract with a customer, Central Inc. (hereafter, Central), to build a six-axis laser cutting machine that will be used by…...

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