Discussion
XM, Ltd. was a small engineering firm that built high-tech robotic devices for electronics manufacturers. One very complex device was partially completed at the end of 2016. Barb McLauren, head engineer, knew the experimental technology was a failure and XM would not be able to complete the $20,000,000 contract next year. However, the corporation was getting ready to be sold in January. She told the controller that the device was 80% complete at year-end and on track for successful completion the following spring. The controller accrued 80% of the contract revenue on December 31, 2016. McLauren sold the company in January 2017 and retired. By mid-year, it became apparent that XM would not be able to complete the project successfully, and the new owner would never recoup his investment.
Please respond to the questions listed below. In addition to your initial response, please be sure to respond to at least two other students' initial responses, as well.
Required Responses:
1. For complex, high-tech contracts, how does a company determine the percentage of completion and the amount of revenue to accrue?
2. What action do you think was taken by XM in 2017 with regard to the revenue that had been accrued the previous year? Was this action in accordance with Generally Accepted Accounting Principles?
3. When a company is being sold, does that company have an obligation to disclose all unfavorable facts to the prospective buyer? Or does the company being sold only have an obligation to disclose facts the prospective buyer specifically asks about? (Note: Please answer this question from the selling company's viewpoint.)