Ling Construction entered into a contract in 1997 to build atunnel at a contract price of $11 million. The company estimatesthat the total costs of the project will be $10 million and that itwill take 3 years to complete. Actual costs incurred & billingsare as follows:
|
Year
|
Costs Incurred
|
Billings
|
|
1997
|
2.5 million
|
2 million
|
|
1998
|
4
|
3.5
|
|
1999
|
3.5
|
5.5
|
|
Totals
|
$10 million
|
$11 million
|
a) Ignoring taxs, calculate LingConstructions' reported operating profits & actual cashflows for each year using the percentage of completion method ofaccounting, with the degree of completion based on the percentageof total costs incurred to date
b) Calculate Ling's reportedoperating profit & actual cash flows for each year using thecompleted contract method of accounting
c) Assume that just prior tothe end of 1998, the estimated cost to complete the tunnelincreases to $11million, with that additional $1million of costs tobe incurred in 1999. Using that assumption, calculate 1998operating profit for the project assuming use of the percentage ofcompletion method.