Brierton Company enters a contract at the beginning of year 1 to build a new federal courthouse for a price of $16 million. Brierton estimates that total cost of the project will be $12 million, and will take four years to complete.
$$\begin{array} { | l | c | c | }
\hline & \text { Costs incurred } & \begin{array} { c }
\text { Payments from federal } \
\text { government }
\end{array} \
\hline \text { Year 1 } & \$ 4 \mathrm { M } & \$ 2 \mathrm { M } \
\hline \text { Year 2 } & \$ 4 \mathrm { M } & \$ 2 \mathrm { M } \
\hline \text { Year 3 } & \$ 2 \mathrm { M } & \$ 6 \mathrm { M } \
\hline \text { Year 4 } & \$ 2 \mathrm { M } & \$ 6 \mathrm { M } \
\hline
\end{array}$$
-If Brierton used cash accounting to account for this project, what would they have reported as profit (loss) in year 2?
A) $ 0
B) $ 1.333M
C) $ (2M)
D) $ (4M)

Question

Brierton Company enters a contract at the beginning of year 1 to build a new federal courthouse for a price of $16 million. Brierton estimates that total cost of the project will be $12 million, and will take four years to complete.
 $$\begin{array} { | l | c | c | } 
\hline & \text { Costs incurred } & \begin{array} { c } 
\text { Payments from federal } \
\text { government }
\end{array} \
\hline \text { Year 1 } & \$ 4 \mathrm { M } & \$ 2 \mathrm { M } \
\hline \text { Year 2 } & \$ 4 \mathrm { M } & \$ 2 \mathrm { M } \
\hline \text { Year 3 } & \$ 2 \mathrm { M } & \$ 6 \mathrm { M } \
\hline \text { Year 4 } & \$ 2 \mathrm { M } & \$ 6 \mathrm { M } \
\hline
\end{array}$$
-If Brierton used cash accounting to account for this project, what would they have reported as profit (loss) in year 2?
A) $ 0
B) $ 1.333M
C) $ (2M)
D) $ (4M)

Quizplus · Accepted Answer

Under cash accounting, revenue is recognized when cash is received and expenses are recognized when cash is paid. Therefore, Brierton would recognize revenue of $2 million in year 1 and $2 million in year 2, and expenses of $4 million in each of year 1 and year 2. This would result in a loss of ($2 million) in year 2, as total revenue of $4 million would be less than total expenses of $8 million ($4 million incurred in year 1 and $4 million incurred in year 2).

Brierton Company Enters a Contract at the Beginning of Year