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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

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 $ 25
2013 50 20
2014 40 40
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-Cost Method

Year

Costs

incurred

Percent

of total

expected costs

Revenue

recognized

Income

2012 $Answer Answer% $Answer $Answer
2013 Answer Answer% Answer Answer
2014 Answer Answer% Answer Answer
$85 $120 $35

(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.

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