Question
In spring 2017, Parmac Engineering Company signed a $240 million contract with the city of Parkersburg, to construct a new city hall, Parmac expects to
In spring 2017, Parmac Engineering Company signed a $240 million contract with the city of Parkersburg, to construct a new city hall, Parmac expects to construct the building within two years and incur expenses of $180 million. The city of Parkersburg paid $60 million when the contract was signed, $120 million ithin the next six months, and the final $60 million exactly one year from the signing of the contract. Parmac incurred $72 million in costs during 2017 and rest in 2018 to complete the contract on time. Parmac's year end is December.
a. Using the cost-to-cost method how much revenue should Parmac recognize in 2017? In 2018? Also, assuming this cost-to-cost method, what is the reported profit for each of the two years?
b. Using the completed contract method how much revenue should Parmac recognize in 2017? In 2018? Also, assuming the completed contract method, what is the reported profit for each of the two years?
c. What issues should Parmac be considering when deciding whether to use the "cost to cost" method or the "completed contract" method?
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