Constructing and Assessing Income Statements Using Percentage-of Completion
On March 15, 2012, Frankel Construction contracted to build a shopping center at a contract price of $120 million. The schedule of expected (which equals actual) cash collection and contract costs follow ($ millions):

Year Cash Collections Cost Incurred
2012 $ 30 $ 30
2013 50 35
2014 40 20
Total $ 120 $ 85

(a) Calculate the amount of revenue, expense, and net income for each of the three years 2012 through 2014 using the percentage-of-completion revenue recognition method. Rounding instructions: Round percentages to the nearest whole number. Use rounded percentages for remaining calculations. Round revenue and income to the nearest whole number.

Percentage of Completion Method
Year Costs incurred Percent of total expected costs Revenue recognized Income
2012 $Answer Answer% $Answer $Answer
2013 Answer Answer% Answer Answer
2014 Answer Answer% Answer Answer
$85 $120 $35

(b) Which of the following statements best summarizes our conclusion about the usefulness of the percentage-of-completion method for this company?

a. The percentage-of-completion method does provide a good estimate of the revenue and income earned in each period.

b. The percentage -of-completion method is not useful because it does not provide information about the total revenues over the life of the project.

c. 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.

d. The percentage-of-completion method is not an acceptable method under GAAP.