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. $\begin{array}{lll}
&\text { Costs incurred }&\text { Payments from federal}\
&&\text { government}\
\text { Year 1 } & \$ 4 \text { million } & \$ 2 \text { million } \
\text { Year 2 } & \$ 4 \text { million } & \$ 2 \text { million } \
\text { Year 3 } & \$ 2 \text { million } & \$ 6 \text { million } \
\text { Year 4 } & \$ 2 \text { million } & \$ 6 \text { million }
\end{array}$
-If Brierton used cash accounting to account for this project, what would they have reported as profit (loss) in year 2?
A)$0
B)$1.33 million
C)$(2 million)
D)$(4 million)

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. $\begin{array}{lll}
&\text { Costs incurred }&\text { Payments from federal}\
&&\text {  government}\
\text { Year 1 } & \$ 4 \text { million } & \$ 2 \text { million } \
\text { Year 2 } & \$ 4 \text { million } & \$ 2 \text { million } \
\text { Year 3 } & \$ 2 \text { million } & \$ 6 \text { million } \
\text { Year 4 } & \$ 2 \text { million } & \$ 6 \text { million }
\end{array}$
-If Brierton used cash accounting to account for this project, what would they have reported as profit (loss) in year 2?
A)$0
B)$1.33 million
C)$(2 million)
D)$(4 million)

Quizplus · Accepted Answer

Under cash accounting, revenue is recognized when cash is received and expenses are recognized when cash is paid. Since Brierton Company entered the contract at the beginning of year 1, they would not have recognized any revenue in year 1 unless they received partial or full payment from the government. In year 2, Brierton would have recognized $4 million in revenue (assuming they evenly recognize revenue over the four-year period), but they would have also recognized $6 million in expenses ($12 million total cost divided by four years equals $3 million in expenses per year). Therefore, their profit in year 2 would be a loss of $2 million ($4 million revenue minus $6 million in expenses). Therefore, the correct answer is C.

Brierton Company Enters a Contract at the Beginning of Year