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

Constructing and Assessing Income Statements Using Cost-to-Cost MethodOn March 15, 2012, Frankel Construction contracted to build a shopping

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.

Enter $ answers in millions.

Cost-to-Cost Method

 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.

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