On 3/15/2012, Frankel construction contracted to build a shopping center at a co

Question

On 3/15/2012, Frankel construction contracted to build a   shopping center at a contract price of $120 million. The   schedule of expected (which equals actual) cash collections and contract   costs follows: $ in millions Cash Cost Assume Year Collections Incurred Billed 2012 $30 $15 $20 2013 $50 $40 $70 2014 $40 $30 $30 Total $120 $85 $120 Assume   year 2012 is the first year of operation for Frankel Construction. *The highlighted parts are   assumed. a.   Calculate revenue, expense, and net income for 2012-2014 using the % of   completion method. 2012 2013 2014 3 year Total % completion Revenue Expense Net Income Balance Sheet: 2012 2013 2014 Accounts Receivable                           (1) Inventory (construction in   progress)  (2) Less: Billings   (contra-inventory)        (3)      Net inventory (CIP) (1) AR = Cum. Billed - Cum.   Collected (2) CIP  = (3) Billings = ? b.   Discuss whether or not the % of completion method provides a good measure of   the company's performance. On 3/15/2012, Frankel construction contracted to build a   shopping center at a contract price of $120 million. The   schedule of expected (which equals actual) cash collections and contract   costs follows: $ in millions Cash Cost Assume Year Collections Incurred Billed 2012 $30 $15 $20 2013 $50 $40 $70 2014 $40 $30 $30 Total $120 $85 $120 Assume   year 2012 is the first year of operation for Frankel Construction. *The highlighted parts are   assumed. a.   Calculate revenue, expense, and net income for 2012-2014 using the % of   completion method. 2012 2013 2014 3 year Total % completion Revenue Expense Net Income Balance Sheet: 2012 2013 2014 Accounts Receivable                           (1) Inventory (construction in   progress)  (2) Less: Billings   (contra-inventory)        (3)      Net inventory (CIP) (1) AR = Cum. Billed - Cum.   Collected (2) CIP  = (3) Billings = ? b.   Discuss whether or not the % of completion method provides a good measure of   the company's performance.

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

Part B:

Percentage of completion does provode a good measure of the construction company's performance it provides a good/reasonable estimated of the revenue and income earned by the company during each period.

Thanks.

2010 2011 2012 % Complete 18% 65% 100%



Revenue 21.18 56.47 42.35 Expense 15.00 40.00 30.00 Income 6.18 16.47 12.35

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