Question

# Constructing and Assessing Income Statements Using Cost-to-Cost Method On March 15, 2014, Frankel Construction contracted to...

Constructing and Assessing Income Statements Using Cost-to-Cost Method
On March 15, 2014, Frankel Construction contracted to build a shopping center at a contract price of \$125 million. The schedule of expected (which equals actual) cash collections and contract costs follow (\$ millions):

Year Cash Collections Cost Incurred
2014 \$ 30 \$ 20
2015 50 45
2016 45 35
Total \$ 125 \$ 100

(a) Calculate the amount of revenue, expense, and net income for each of the three years 2014 through 2016 using the cost-to-cost method.

Round answers to the nearest whole number.

Cost-to-Cost Method

Year

Costs

incurred

Percent

of total

expected costs

Revenue

recognized

Income

\$100 \$125 \$25

(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.

Answer : Calculation of Amount of revenue, expense, and net income for each of the three years 2014 through 2016 using the cost-to-cost method :

Belo is the table showing the following :

 Year Cost Incurred Percentage of Total Expected Cost Revenue Recognized Income (Revenue Recognized - Cost Incurred) 2014 20 20% (20 / 100) 25 (125*20%) 5 2015 45 45% (45 / 100) 56(125 * 45%) 11 2016 35 35% (35 / 100) 44(125 * 35%) 9 100 125 25

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

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