Question - Klondike Construction Company is building a highway under a three-year construction contract. Klondike will receive $11,200,000 for building five miles of highway. Klondike estimates that it will incur $10,000,000 of costs before the contract is completed. At the end of year one, Klondike had incurred $3,000,000 of contract costs.
a. How much income from the contract must Klondike report for year one?
b. Assume Klondike incurs an additional $5,000,000 of costs during the second year. How much income should be reported for that year?
c. If Klondike incurs another $2,500,000 of costs in the third and final year of the contract, how much income must Klondike report for the third year?
d. Will Klondike receive or pay look-back interest? Explain.