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Question - Income recognition for a contractor - On October 15, 2010, Flanikin Construction Company contracted to build a shopping center at a contract price of $180 million. The schedule of expected and actual cash collections and contract costs is as follows:
Year
Cash Collections from Customers
Estimated and Actual Cost Incurred
2010
$36,000,000
$12,000,000
2011
$45,000,000
2012
$48,000,000
2013
$54,000,000
$24,000,000
TOTAL
$180,000,000
$120,000,000
Required -
a) Calculate the amount of revenue, expense, and net income for each of the four years under the following revenue recognition methods: (1) Percentage-of-completion method. (2) Completed contract method.
b) Show the journal entries Flanikin will make in 2010, 2011, 2012, and 2013 for this contract. Flanikin accumulates contract costs in a Contract in Process account. Although the costs involve a mixture of cash payments, credits to assets, and credits to liability accounts, assume for purposes of this problem that all costs are recorded as credits to Accounts Payable.
c) Which method do you believe provides the better measure of Flanikin Construction Company's performance under the contract? Why?
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