JCR, Jets, a calendar-year company, accepts a contract with a major airline to build 4 jets on January 2, 2015. JCR accepts a fixed fee of $300 million and must complete the project within three years. JCR Jets uses the percentage-of-completion method of accounting. It determined percent complete using the percentage of labor hours incurred relative to expected total labor hours. Management expects that it will take 2 million labor hours to build the three jets. During 2015, JCR incurs actual costs of $112 million and estimates it will cost an additional $160 million to complete the jets. It incurred 800,000 labor hours during 2015.
On January 3, 2016, JCR Jet agrees with its customer to upgrade the jets. The parties agree that the fixed fee for the four jets will now be $350 million. JCR estimates that this upgrade will require an additional 400,000 labor hours and additional costs of $40 million.
Provide a written analysis and your conclusions of how JCR should account for this contract upgrade, using the Codification for support. Provide any necessary computations.
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