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Constructing and Assessing Income Statements Using Cost-to-Cost Method 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 2018 . 88 million 2019.. .. 77 million Total . $220 million $ 36 million 81 million 63 million $180 million
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.

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Answer and Explanation:

a. The computation of the e amount of revenue, expense, and net income for each of the three years 2017 through 2019 is shown below:

Year                 2017                    2018                       2019

Expense         $36 million        $81 million               $63 million    (A)

Total

cost incurred   $180 million      $180 million            $180 million   (B)

Completion

Percentage     20%                   45%                         35%   C =  (A ÷ B)

Revenue

Recognized    $44                    $99                         $77     D = ($220 million × C)

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

b. As per the above calculation, the cost-to-cost method provides a good measure as it creates a relationship between the cost incurred and recognized the revenue

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