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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 $840 million. The contract price of $1,050 million is to be paid as follows: $350 million at the time of signing; $350 million on December 31, 2016; and $350 million at completion in May 2017. General Electric incurred the following costs in constructing the generator: $336 million in 2016 and $504 million in 2017.

Required:
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.

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Answer:

Year     Costs          % Total cost           Revenue         Income

          incurred      excepted costs     recognized

         

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million          

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million              

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million          

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million

2016      336                  40%                    420                     84

2017      504                  60%                     630                   126

Total      840                 100%                   1,050                 210

Workings

1. % Total cost excepted costs

2016 = 336 / 840 = 0.4 = 40%

2017 = 504/840 = 0.6 = 60%

2. Revenue recognized

2016 = 1,050 * 40% = 420

2017 = 1,050 * 60% = 630

3. Income = Revenue recognized - Cost incurred

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