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 $ 10 2013 50 25 2014 40 50 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-CostMethod Percent of total Revenue expected costs recognized Income Costs Year incurred 2012 $ 2013 2014 $85 $120 $35

Answer 1

a)

amount of revenue, expense, and net income for each of the three years 2012 -14
under Cost-to-Cost Method (in Million $)

Cost-to-Cost Method
Percent
Year	Costs Incurred (a)	Percent of total expected Cost (b) = (Costs Incurred (a) / Total Cost)	Revenue Recognized ($120 million x (b)	Income (Revenue Recognized - Costs Incurred)
2012	$ 10	(10/85)   = 12%	$14	(14-10) =    $4
2013	25	(25/85)    = 29%	35	(35-25) = $10
2014	50	(50/85) = 59%	71	(71-50) = $21
Total	$85		$120	$35

b)

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

The cost-to-cost method is based on Percent of Completion of project which is acceptable method under GAAP for estimating revenue and net income for each period if project span is more than one year. Here project completed in three year.