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 percentage-of-completion method to account for this project, what would they have reported as 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?  

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