Constructing and Assessing Income Statements Using Cost$-$to$-$Cost Method

Assume GE Hitachi Nuclear Energy agreed in May of the current fiscal year to construct a nuclear generator for NSTAR, a utility company serving the Boston area. GE Hitachi estimated that its construction costs would be $$3,600$ million. The contract price of $$4,500$ million is to be paid as follows: $$1,500$ million at the time of signing; $$1,500$ million on December $31$ of the current fiscal year; and $$1,500$ million at completion in May, in the next fiscal year. GE Hitachi Nuclear Energy incurred the following costs in constructing the generator: $$1,440$ million in the current fiscal year and $$2,160$ million in the next fiscal year.

a$.$ Compute the revenue, expense, and income for each year, and for both years combined, under the company$$s cost$-$to$-$cost revenue recognition method.

Note: Do not use a negative sign.

Note: Round answers to the nearest dollar, if applicable.

$($$ millions$)$ Current Fiscal Year Next Fiscal Year Total

Revenue Answer $1$

$0$

Answer $2$

$0$

Answer $3$

$0$

Expense Answer $4$

$0$

Answer $5$

$0$

Answer $6$

$0$

Income

$0$

$0$

$0$

b$.$ Discuss whether or not the cost$-$to$-$cost method provides a good measure of the company$$s performance under the contract.

The cost$-$to$-$cost method normally provides a Answer $7$

reasonable

estimate of the revenues, expenses, and income earned for each period.

Feedback

Partially correct