Revenue Recognition Under Long-Term Construction Contracts.

In June 2014, Biltmore Construction Company (BCC) was hired by the City of Phoenix, Arizona, to assist in constructing its new Trade Ceme complex. The construction agreement called for work to begin no later than August 2014 and required Biltmore to construct the concrete frame for the complex. Under the terms of the three-year contract, BCC was to receive a total of $10 million in cash payments from the City of Phoenix, to be paid as follows: 25 when the project was 30 percent complete, 25 percent when the project was 60 percent complete, and the remaining 50 percent, when the project was fully complete. The contract required that BCC's completion estimates be certified by an independent engineering consultant before any cash progress payments would be made. In preparing its bid, Biltmore estimated that the total cost to complete the project would be $8.3 million assuming no cost overruns. During the first year of the contract, BCC incurred actual costs of $2.49 million and on June 30, 2015, the engineering firm of J. Graham& Associates determined that the project had attained a 30 percent completion level. (BCC's fiscal year ran from July I to June 30.) In the following year, BCC incurred actual costs of $3.1 million, and on June 30, 2016, the firm of J. Graham & Associates determined that the project had attained at least a 60 percent completion level. By May 2017, BCC had completed the remainder of the project. Actual costs incurred during the year to June 30, 2017, amounted to $3.11 million. The firm received a certification for the fully completed work. 1. Assuming that BCC had no other sources of revenue or expenses, determine the level of profits to be reported for the years ended June 30, 2015, 2016, and 2017, using the following revenue recognition methods:

a. Percentage of completion

b. Completed contract

c. Cash basis

2. Which set of results best reflects the economic performance of the company over the period 2015-2017. Why?