King Construction Company is engaged in a road construction contract to build a highway over a three-year period. King will receive $11,200,000 for building five miles of highway. King estimates that it will incur $10,000,000 of costs before the contract is completed. As of the end of the first year King incurred $3,000,000 of costs allocated to the contract.
a. How much income from the contract must King report during the first year?
b. Assume King incurs an additional $5,000,000 of costs during the second year. How much income is reported during that year?
c. Assume that King incurs an additional $2,500,000 of costs in the third and final year of the contract. How much does King report during the third year?
d. Will King receive or pay look-back interest? Explain.