Question

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	$ 25
2013	50	20
2014	40	40
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
Year	Costs incurred	Percent of total expected costs	Revenue recognized	Income
2012	?$	?%	?$	?$
2013	?$	?%	?$	?$
2014	?$	?%	?$	?$
	$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?

1.The cost-to-cost method is not useful because it does not provide information about the total revenues over the life of the project.

2.The cost-to-cost method is an acceptable method under GAAP for contracts spanning more than one accounting period.

3.The cost-to-cost method does not provide a good estimate of the revenue and income earned in each period.

4.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.

Please answer all parts of the question.

Answer 1