Constructing and Assessing Income Statements Using Cost-to-Cost Method
On March 15, 2012, Frankel Construction contracted to build a shopping center at a contract price of $120 million. The schedule of expected (which equals actual) cash collections and contract costs follow ($ millions):
Year | Cash Collections | Cost Incurred |
2012 | $ 30 | $ 15 |
2013 | 50 | 40 |
2014 | 40 | 30 |
Total | $ 120 | $ 85 |
(a) Calculate the amount of revenue, expense, and net income for each of the three years 2012 through 2014 using the cost-to-cost method.
Rounding instructions: Round percentages to the nearest whole number. Use rounded percentages for remaining calculations. Round revenue and income to the nearest whole number.
Enter $ answers in millions.
Cost-to-Cost Method |
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Year | Costs incurred | Percent of total expected costs | Revenue recognized | Income |
2012 | $Answer 15 | Answer 18 % | $Answer 22 | $Answer 7 |
2013 | Answer 40 | Answer 47 % | Answer 56 | Answer 16 |
2014 | Answer 30 | Answer 35 % | Answer 42 | Answer 12 |
$85 | $120 | $35 |
(b) Which of the following statements best summarizes our conclusion about the usefulness of the cost-to-cost method for this company?
The cost-to-cost method is not useful because it does not provide information about the total revenues over the life of the project.
The cost-to-cost method is an acceptable method under GAAP for contracts spanning more than one accounting period.
The cost-to-cost method does not provide a good estimate of the revenue and income earned in each period.
The cost-to-cost method is not useful because it is so dependent upon the completion estimate used by the company and can be easily manipulated.
The correct answer is: The cost-to-cost method is an acceptable method under GAAP for contracts spanning more than one accounting period.