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Constructing and Assessing Income Statements Using Percentage-of Completion
On March 15, 2014, Frankel Construction contracted to build a shopping center at a contract price of $125 million. The schedule of expected (which equals actual) cash collection and contract costs follow ($ millions):
2014
$ 30
$ 20
2015
50
45
2016
35
Total
$ 125
$ 100
(a) Calculate the amount of revenue, expense, and net income for each of the three years 2014 through 2016 using the percentage-of-completion revenue recognition method. (Round answers to the nearest whole number.)
$Answer
Answer %
Answer
$100
$125
$25
(b) Which of the following statements best summarizes our conclusion about the usefulness of the percentage-of-completion method for this company?
The percentage -of-completion method is not useful because it does not provide information about the total revenues over the life of the project. The percentage-of-completion method is an acceptable method under GAAP for contracts spanning more than one accounting period. The percentage-of-completion method does not provide a good estimate of the revenue and income earned in each period. The percentage -of-completion 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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