Reference no: EM132671519

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                                      36,000,000

2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000,000                                      48,000,000

2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,000,000                                       24,000,000

                                                                                   180,000,000                                  $120,000,000

Problem 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.

Problem 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.

Problem c. Which method do you believe provides the better measure of Flanikin Construction Company's performance under the contract? Why?