MEASURING INCOME FROM LONG-TERM CONTRACTS. On January 1, 2010, Turner Construction Company agreed to construct an observatory for Dartmouth College for $120 million. Dartmouth College must pay $30 million upon signing and $30 million at the end of 2010, 2011, and 2012. Expected construction costs are $10 mil- lion for 2010, $60 million for 2011, and $30 million for 2012. Assume that these cash flows occur at the end of each year. Also assume that an appropriate interest rate for this contract is 10 percent. Amortization schedules for the deferred cash flows follow.
Amortization Schedule for Cash Received (amounts in thousands)
|
Year
|
Balance Jan. 1
|
Interest Revenue
|
Payment
|
Reduction in Principal
|
Balance Dec. 31
|
|
2010
|
$74,606
|
$7,460
|
$30,000
|
$22,540
|
$52,066
|
|
2011
|
52,066
|
5,207
|
30,000
|
24,793
|
27,273
|
|
2012
|
27,273
|
2,727
|
30,000
|
27,273
|
0
|
Chapter 8 Operating Activities
Amortization Schedule for Cash Disbursed (amounts in thousands)
|
Year
|
Balance Jan. 1
|
Interest Expense
|
Payment
|
Reduction in Principal
|
Balance Dec. 31
|
|
2010
|
$81,217
|
$8,122
|
$10,000
|
$ 1,878
|
$79,339
|
|
2011
|
79,339
|
7,934
|
60,000
|
52,066
|
27,273
|
|
2012
|
27,273
|
2,727
|
30,000
|
27,273
|
0
|
Required
a. Indicate the amount and nature of income (revenue and expense) that Turner would recognize during 2010, 2011, and 2012 if it uses the completed-contract method. Ignore income taxes.
b. Repeat Part a using the percentage-of-completion method.
c. Repeat Part a using the installment method.
d. Indicate the balance in the construction in process account on December 31, 2010, 2011, and 2012 (just prior to completion of the contract) under the completed-contract and the percentage-of-completion methods.
Text Book: Financial Reporting, Financial Statement Analysis and Valuation: A Strategic Perspective By James Wahlen, Stephen Baginski, Mark Bradshaw.