Final answer:
The company should use the cost-to-cost method to account for construction revenue. In the cost-to-cost method, revenue and expenses are recognized in proportion to the costs incurred on the project.
Step-by-step explanation:
The method that the company should use to account for construction revenue in this scenario is the cost-to-cost method.
In the cost-to-cost method, revenue and expenses are recognized in proportion to the costs incurred on the project. As the project progresses, revenue is recognized based on the percentage of completion, which is determined by comparing the actual costs incurred to the estimated total costs of the project.
This method is commonly used in long-term construction projects where reliable estimates can be made of the extent of progress and cost to complete each project.
This method is ideal for projects extending over several years with certain collection of receivables, specified contract prices, and where reliable estimates can be made of progress and costs to complete. It recognizes revenue as the construction progresses, which aligns with both the revenue recognition principle, allowing for a more accurate reflection of the company's financial status over the course of the project.