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

Assume

GE Hitachi Nuclear Energy agreed in May 2019 to construct a nuclear generator for NSTAR,

a utility company serving the Boston area. GE Hitachi estimated that its construction costs would be

$600 million. The contract price of $750 million is to be paid as follows: $250 million at the time of

signing; $250 million on December 31, 2019; and $250 million at completion in May 2020. GE Hitachi

Nuclear Energy incurred the following costs in constructing the generator: $240 million in 2019 and

$360 million in 2020.

a. Compute the revenue, expense, and income for both 2019 and 2020, and for both years combined,

under the companys cost-to-cost revenue recognition method.

b. Discuss whether or not we believe the cost-to-cost method provides a good measure of the com-

panys performance under the contract.