# Constructing and Assessing Income Statements Using Cost-to-Cost Method

## 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 instructionsRound percentages to the nearest whole number. Use rounded percentages for remaining calculations. Round revenue and income to the nearest whole number.

## (b) Which of the following statements best summarizesour conclusion about the usefulnessof 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.

Sharing is caring!

### Most Viewed Posts

error: Content is protected !!