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# Brierton Company enters a contract at the beginning of year

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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.

Cost Incurred Payments from federal Government

Year 1 \$4M \$2M
Year 2 \$4M \$2M
Year 3 \$2M \$6M
Year 4 \$2M \$6M

1. If Brierton used percentage-of-completion method to account for this project, what would they have reported as profit in year 2?

2. If Brierton used cash accounting to account for this project, what would they have reported as profit (loss) in year 2?

Yert Corporation issues 100 stock options to its CEO on January 1, 2005. The stock options have an exercise price of \$50 and the current stock price is \$50 at the grant date. There are 200 shares outstanding as of January 1, 2005. Two years later, the CEO exercises his options.

A) At this time the stock price is \$70 and there are 200 shares outstanding (before exercise of stock options). What will the stock price roughly be after the options are exercised?

B) At this time the stock price is still \$50 and there are still 200 shares outstanding (before exercise of stock options). What will the stock price be after the options are exercised?

#### Solution Preview

1. If Brierton used percentage-of-completion method to account for this project, what would they have reported as profit in year 2?

(4/12) * (16 - 12), the company incurred 4 million of the 12 million in total costs.

= 4/12 * 4 = 1.333 ...

#### Solution Summary

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.

Cost Incurred Payments from federal Government

Year 1 \$4M \$2M
Year 2 \$4M \$2M
Year 3 \$2M \$6M
Year 4 \$2M \$6M

1. If Brierton used percentage-of-completion method to account for this project, what would they have reported as profit in year 2?

2. If Brierton used cash accounting to account for this project, what would they have reported as profit (loss) in year 2?

Yert Corporation issues 100 stock options to its CEO on January 1, 2005. The stock options have an exercise price of \$50 and the current stock price is \$50 at the grant date. There are 200 shares outstanding as of January 1, 2005. Two years later, the CEO exercises his options.

A) At this time the stock price is \$70 and there are 200 shares outstanding (before exercise of stock options). What will the stock price roughly be after the options are exercised?

B) At this time the stock price is still \$50 and there are still 200 shares outstanding (before exercise of stock options). What will the stock price be after the options are exercised?