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

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.