A firm signs a long-term contract to construct a building for $10,000,000. The building is to be completed in two years at a cost of $8,000,000. At the end of the first year,

$6,000,000 of costs has been incurred. Under the contract terms, the customer pays for the building during the first year. What are the financial statement effects of this transaction if

(a) revenue is recognized under the completed contract method, and

(b) revenue is recognized using the percentage of completion method? What forecasts, if any, do you have to make to complete the recording of this transaction? What factors would determine which of these two approaches is appropriate? As a financial analyst, what questions would you raise with the firm’s CFO?

AppendixLO1