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. The contract price of $750 million is to be paid as follows: $250 million at the time of signing; $250 million on December 31, 2016; and $250 million at comple-tion in May 2017. General Electric incurred the following costs in constructing the generator: $240 million in 2016 and $360 million in 2017.

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

b. Discuss whether or not you believe the cost-to-cost method provides a good measure of General Electrics performance under the contract.