Question

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.

Enter $ answers in millions.

Cost-to-Cost Method
Year	Costs incurred	Percent of total expected costs	Revenue recognized	Income
2014	Answer	Answer	Answer	Answer
2015	Answer	Answer	Answer	Answer
2016	Answer	Answer	Answer	Answer
	$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 1

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.