Constructing and Assessing Income Statements Using Cost-to-Cost Method On March 15, 2014, Frankel Construction contracted to build a shopping center at a contract price of $125 million. The schedule of expected (which equals actual) cash collections and contract costs follow ($ millions):

Year Cash Collections Cost Incurred
2014 $30 $20
2015 50 45
2016 45 35
Total $125 $100

Required:
a. Calculate the amount of revenue, expense, and net income for each of the three years 2014 through 2016 using the cost-to-cost method.
b. What best summarizes our conclusion about the usefulness of the cost-to-cost method for this company?

b. The best summary is that under generally accepted accounting principles (GAAP), the cost-to-cost method is a method that is acceptable to be applied to contracts that span more than one accounting period.

Therefore, the cost-to-cost method is employed in calculating the revenue and net income for Frankel Construction for each of the years 2014, 2015 and 2016.

Explanation:

a. Calculate the amount of revenue, expense, and net income for each of the three years 2014 through 2016 using the cost-to-cost method.

Note: See the attached excel file for the calculations.

Cost-to-cost method can be described as a cost and revenue recognition approach in which all costs recorded to date on a project are divided by the total expected costs to be incurred on the project in order to obtain the overall percentage of completion of the project which is employed in estimating revenue and net income.

b. What best summarizes our conclusion about the usefulness of the cost-to-cost method for this company?

The best summary is that under generally accepted accounting principles (GAAP), the cost-to-cost method is a method that is acceptable to be applied to contracts that span more than one accounting period.

In this question, the cost-to-cost method is employed in calculating the revenue and net income for this company for each of the year 2014, 2015 and 2016.