Question

On March 15, 2017, Gilbert Construction contracted to build a shopping center at a contract price of $220 million. The schedule of expected (which equals actual) cash collections and contract costs follows:
Year Cash Collections Cost Incurred
2017 55 million $36 million
2018 88 million 81 million
2019 77 million 63 million
Total $220 million $180 million

Required:
a. Calculate the amount of revenue, expense, and net income for each of the three years 2017 through 2019, and for all three years combined, using the cost-to-cost revenue recognition method.
b. Discuss whether or not the cost-to-cost method provides a good measure of this construction com- pany's performance under the contract.

Answer 1

Answer:

a.                                                              2017          2018           2019

Expenses incurred for the year A     36 million   81 million    63 million

Estimated total cost B                       180 million  180 million  180 million

% Completion (A/B) C                               20%           45%           35%

Revenue recognized for the D          44 million   99 million   77 million

period (220 million * C)

Gross profit (D-A)                              $8 million  $18 million $14 million

b. Yes, the cost-to-cost method provides a good measure of this construction company's performance under the contract.