The Giamatti Construction Company primarily builds houses, and rarely is a house only partially completed as of December 31. However, this year Giamatti is also building a motel, which it started in March and expects to complete next April. The motel calls for a fee of $5 million. Expected total costs are $4.25 million, and $2.55 million of these had been incurred as of December 31.
Required:
Assume that, excluding the motel project, Giamatti's income before taxes will be $ 1.25 million both this year and next. What will each year's income before taxes be, including the motel project, (a) if Giamatti uses the completed-contract method and (b) if it uses the percentage-of-completion method? (Assume actual motel costs in fact turn out to be $4.25 million.) Which method should Giamatti use?