Klondike Construction Company is building a highway under a three-year construction contract. Klondike will receive $11,200,000 for building five miles of highway. Klondike estimates that it will incur $10,000,000 of costs before the contract is completed

1. Klondike must report $2,200,000 of income for year one. This is calculated by subtracting the cost incurred in year one ($3,000,000) from the total estimated costs ($10,000,000) and dividing the result by the total contract price ($11,200,000): (($10,000,000 - $3,000,000)/$11,200,000) x $11,200,000 = $7,000,000 (total estimated profit) - $4,800,000 (profit from years two and three) = $2,200,000 (profit from year one). 2. Klondike should report $3,600,000 of income for the second year. This is calculated by subtracting the total costs incurred in years one and two ($8,000,000) from the total estimated costs ($10,000,000) and dividing the result by the total contract price ($11,200,000): (($10,000,000 - $8,000,000)/$11,200,000) x $11,200,000 = $2,000,000 (total estimated profit from years two and three) - $400,000 (profit from year three) = $1,600,000 (profit from year two) + $2,000,000 (profit from year three) = $3,600,000 (total profit from years two and three). 3. Klondike must report $400,000 of income for the third year. This is calculated by subtracting the total costs incurred in all three years ($10,500,000) from the total estimated costs ($10,000,000) and then subtracting the total estimated profit ($2,000,000) from the result: (($10,000,000 - $10,500,000)/$11,200,000) x $11,200,000 = -$500,000 (total estimated loss from years one to three) - $1,600,000 (profit from year two) = -$2,100,000 (total estimated loss from year one to three) + $2,000,000 (total estimated profit from years two and three) = -$100,000 (total estimated loss from year one to three) + $500,000 (profit from year three) = $400,000 (profit from year three). 4. It is unclear whether Klondike will receive or pay look-back interest, as this depends on the terms of the contract and any applicable regulations or laws. Look-back interest is typically used to adjust the contract price or payment schedule if the actual costs or progress deviate from the original estimates, and can result in either a payment to the contractor or the client.