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|
|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.
|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|
(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.