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Craig A. Smith & Associate, Inc. and MPS31), LLC Notes to Financial Statements NOTE 1 — NATURE OF THE COMPANIES & SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Leasehold Improvements The general policy for leasehold improvements is that they are to be amortized over the shorter of the expected life of the leasehold improvement or the term of the lease. The Companies are currently amortizing its leasehold improvements over the term of the lease which is sixty four months. At the termination of a lease, any balances remaining thereon are written off in the current period. The accumulated amortization is reported on the Combined Balance Sheets, with the current year's portion included on the Combined Statements of Income. Revenue and Cost Recognition The Companies use the accrual basis of accounting for revenue recognition with respect to its contract work. Duration of contracts vary based on scope and nature of the services. Engineering contracts for design through construction observation typically range between twelve months up to thirty six months; survey contracts typically are less than twelve months; engineering feasibility studies range from one to six months; and utility locate contracts typically are for two years with options to renew. There are also numerous small jobs within engineering, survey, or locates that are completed in days or weeks. The various jobs in progress are reviewed periodically and an accrual is made that estimates cost overruns. All work is guaranteed and additional work may need to be performed that had not been included in the original contract and may not be billable. Lump sum contract revenue is billed and recognized based upon the percentage of completion of the project. All lump sum contracts provide for billing on a monthly basis as services are rendered. Each month management reviews the cost versus budget and the actual work product produced to arrive at a percent complete by billable task. The current asset, "Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts" represents revenues recognized in excess of amounts billed to customers. Although most contracts do not contain guarantee liabilities, on the locate contracts, if damage is determined to be a result of the companies' failure to locate a Locatable facility with reasonable accuracy, then the companies shall be liable for damages and will not be paid for the Locate. Time and material contract revenue is recognized based on established hourly rates and material mark-up factors on a monthly basis and billed monthly as services are rendered. The timing of when customers are billed is generally based on advance billing terms or contingent upon completion of certain phases of the work, as stipulated in the contract. Note Receivable The Companies recognize interest income related to notes receivable based on accrual basis of accounting and the terms of the related note receivable. Allowance for Doubtful Accounts The Companies record bad debt expense/allowance based on specific identification of accounts receivable that management determines are unlikely to be collected in full based on aging and other specific considerations. All outstanding accounts receivable accounts are reviewed monthly to determine collectability on an individual basis. Account balances deemed to be uncollectible are charged to the bad debt expense after all means of collection have been exhausted and the potential for recovery is considered remote. The Companies recorded bad debt expense for the years ended December 31, 2015 and 2014 of $1,093 and $350, respectively. -7- 57