Chiatti Company enters a contract at the beginning of year 1 to build a new federal courthouse for a price of $16 million. Chiatti estimates that total cost of the project will be $12 million and will take four years to complete.

(a.) If Chiatti used the percentage-of-completion method to account for this project, what would they have reported a profit in year 2?

(b.) If Chiatti used cash accounting to account for this project, what would they have reported as profit (loss) in year 2?

Costs incurred Year 1 Year 2 Year 3 Year 4 $4 million $4 million $2 million $2 million Payments from federal government $2 million $2 million $6 million $6 million