48. LO.5 On March 31, 2011, Big Boats Company entered into a contract with Vacations Unlimited to produce a state-of-the-art cruise ship, to be completed within three years.

Big Boats estimated the total cost of building the ship at $300 million. The contract price was $400 million. The ship was completed on February 15, 2014.

a. What tax accounting method must Big Boats use for the contract? Why?

b. Using the financial data provided relating to the contract’s performance, complete the following schedule:

Total Costs Incurred to Date Total Percentage of Contract Completed Current-Year Revenue Accrued Current-Year Costs Deductible 12/31/11 $ 90 million ——— ——— ———
12/31/12 150 million ——— ——— ———
12/31/13 270 million ——— ——— ———
12/31/14 360 million N/A ——— ———

c. What are the consequences of the total cost of $360 million exceeding the estimated total cost of $300 million?