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):
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2014
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$ 30
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$ 20
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2015
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50
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45
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2016
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45
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35
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Total
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$ 125
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$ 100
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(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.)
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2014
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$Answer
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Answer %
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$Answer
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$Answer
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2015
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Answer
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Answer %
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Answer
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Answer
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2016
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Answer
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Answer %
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Answer
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Answer
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|
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$100
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$125
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$25
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(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.