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 35 20 $85 2013 2014 Total $30 50 40 $ 120 (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 Percent of total Revenue expected costs recognized Costs Year incurred 2012 S 2013 2014 $85 96 $ 96 96 $120 S Income $35 (b) Which of the following statements best summarizes our conclusion about the usefulness of the cost-to-cost method for this company? OThe cost-to-cost method is not useful because it does not provide information about the total revenues over the life of the project. OThe cost-to-cost method is an acceptable method under GAAP for contracts spanning more than one accounting period. OThe cost-to-cost method does not provide a good estimate of the revenue and income earned in each period. OThe 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.
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 35 20 $85 2013 2014 Total $30 50 40 $ 120 (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 Percent of total Revenue expected costs recognized Costs Year incurred 2012 S 2013 2014 $85 96 $ 96 96 $120 S Income $35 (b) Which of the following statements best summarizes our conclusion about the usefulness of the cost-to-cost method for this company? OThe cost-to-cost method is not useful because it does not provide information about the total revenues over the life of the project. OThe cost-to-cost method is an acceptable method under GAAP for contracts spanning more than one accounting period. OThe cost-to-cost method does not provide a good estimate of the revenue and income earned in each period. OThe 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.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Transcribed Image Text: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
2013
2014
Total
$30
50
40
$ 120
Costs
Year incurred
2012 $
2013
2014
(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.
$30
35
20
$85
$85
Cost-to-Cost Method
Percent
Revenue
of total
expected costs recognized
96 $
%6
%
$120
$
Income
$35
(b) Which of the following statements best summarizes our conclusion about the usefulness of the cost-to-cost method for this company?
OThe cost-to-cost method is not useful because it does not provide information about the total revenues over the life of the project.
OThe cost-to-cost method is an acceptable method under GAAP for contracts spanning more than one accounting period.
OThe cost-to-cost method does not provide a good estimate of the revenue and income earned in each period.
OThe 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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