Question

Constructing and Assessing Income Statements Using Cost-to-Cost Method
Assume General Electric Company agreed in May 2016 to construct a nuclear generator for NSTAR, a utility company serving the Boston area. General Electric Company estimated that its construction costs would be $360 million. The contract price of $450 million is to be paid as follows: $150 million at the time of signing; $150 million on December 31, 2016; and $150 million at completion in May 2017. General Electric incurred the following costs in constructing the generator: $144 million in 2016 and $216 million in 2017.

a. Compute the amount of General Electric's revenue, expense, and income for both 2016 and 2017, and for both years combined, under the cost-to-cost revenue recognition method.
Enter dollar amounts in millions.

Cost-to-Cost Method
Year	Costs incurred	% of total excepted costs	Revenue recognized	Income
2016	Answer	Answer	Answer	Answer
2017	Answer	Answer	Answer	Answer
Total	Answer		Answer	Answer

Answer 1

a. Compute the amount of General Electric's revenue, expense, and income for both 2016 and 2017, and for both years combined, under the cost-to-cost revenue recognition method.

.

Cost-to-Cost Method
Year	Costs incurred	% of total excepted costs	Revenue recognized	Income
2016	$144	40%	$180	$36
2017	$216	60%	$270	$54
Total	$360		$450	$90

.

Working

The contract price of $450 million

Year	Costs incurred	% of total excepted costs	Revenue recognized	Income
2016	$144	144 / 360 = 0.40 = 40%	450 * 40% = 180	180 - 144 =36
2017	$216	216 / 360 = 0.60 =60%	450 * 60% = 270	270-216 =54
Total	$360 million		450 million	90 million

.

* The formula for the cost to cost method is to divide all costs recorded up to date on a construction project by the total estimated amount of costs that will be incurred for that project.

The result is an overall percentage of completion that is then used for billing and revenue recognition purposes, the deduct previously recognized to calculate current period recognition .