Aldc Case Report

ALDC Case Study

Professor Kevin Brewer

Commerce 4FK3: C01

Due Date: Monday, September 29, 2014

Group: ALDC

B) Evaluate each of the four income recognition methods described in the case relative to the criteria for revenue and expense recognition. Which method best portrays the operating performance and financial position of ALDC? Discuss your reasoning. What assumptions about the nature of the firm's operations would justify the other revenue recognition methods given?

The “percentage of completion method” best portrays the operating performance and financial position of ALDC. This is because it recognizes revenue and income continuously to projects that are long term especially here where development work will take nine years. Joan Locker and Bill Dasher can recognize gains or losses in every accounting period the ALDC operates in. This method works best when there are stages of project completion such as the number of stories completed for a building or the number of miles built for a highway; and constantly estimates the percentage of the project that is complete, its revenues and costs to complete the project. This method cannot be used when there doubt in the percentage of completion or the remaining costs complete the project. The contractor or builder of the project must have sufficient knowledge to estimate the minimum total revenue to make a return on the investment and the maximum total cost to make the project. This method can also overstate overstate revenues and gross profits if expenditures are recognized before they contribute to completed work.

The risks associated in this method are that:

i) Cost of development work may be more (or less) than expected. This is the biggest risk for ALDC. The company signs a legal agreement that includes a selling price when the sale occurs. Development costs are incurred over the nine years and the cost of labour and material required can change over the course of that period. The land may...