LONG-TERM CONSTRUCTION CONTRACTS (SPECIAL REVENUE RECOGNITION) JLM

ILLUSTRATIVE PROBLEMS
Problem 1
In 2018, CabRia Builders agreed to construct a commercial building at a price of P1,000,000. CabRia Builders uses the
percentage of completion method. The information relating to the costs and billings for the contract is as follows:
2018 2019 2020
Cost incurred to date P 280,000 P 600,000 P 785,000
Estimated costs to complete 520,000 200,000 -
Customer billings to date 150,000 400,000 1,000,000
Collection of billings to date 120,000 320,000 940,000

Required:
1. What is the amount of gross profit to be recognized for 2018, 2019, and 2020, respectively?
2. What is the balance of the Construction in Progress, net of Contract Billings account at CabRia’s December 31,
2019 balance sheet?
3. Using the same problem, compute for construction revenue to be recognize in 2018, 2019 and 2020, respectively
assuming the use of zero-profit method.

Problem 2
CabRia Mall Builders was recently awarded a P1,120,000 contract to construct a shopping mall for Doren Inc. CabRia Mall
Builders estimates it will take 42 months to complete the contract. The company uses the cost-to-cost method to estimate
profits (use two decimal places).

The following information details the actual and estimated costs for the year 2017 to 2020:
Actual cost Estimated cost
each year to complete
2017 P 520,000 P 544,000
2018 264,000 312,000
2019 192,000 152,000
2020 136,000 -

Required:
How much is the realized gross profit (loss) in 2019?

Problem 3
CabRia Construction Company recognized gross profit of P31,500 on its long-term project which has accumulated costs of
P61,250. To finish the project, the company estimates that it has to incur additional cost of P122,500. Billings made were
40% of the contract price. How much is the construction in progress net of billings? Indicate whether current asset or
current liabilities.

Problem 4
Dreamer, Builders Inc. has consistently used the percentage of completion method of accounting for construction-type
contracts. During 2020 Dreamer started work on a P 9,000,000 fixed-price construction contract that was completed in
2021. Dreamer’s accounting records disclosed the following:
December 31
2020 2021
Cumulative contract costs incurred P 3,900,000 P 6,300,000
Estimated cost to complete 7,800,000 8,100,000

How much income would have recognized on this contract for the year ended December 31, 2021?

Problem 5
State Co. recognizes construction revenue and expenses using the percentage of completion method. During 2020 a single
long-term project was begun, which continued through 2021. Information on the project follows:
2020 2021
Accounts receivable from construction contract P 100,000 P 300,000
Construction expenses 105,000 192,000
Construction in progress 122,000 364,000
Partial billings on contract 100,000 420,000

Profit recognized from the long-term construction contract in 2021 should be how much?
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LONG-TERM CONSTRUCTION CONTRACTS (SPECIAL REVENUE RECOGNITION) JLM
Problem 6
On April 1, 2021, Gloria Inc. entered into a cost-plus fixed-fee contract an electric generator for Cabrera Corporation. At the
contract date, Gloria estimated that it would take two years to complete the project at a cost of P 2,000,000. The fixed fee
stipulated in the contract is P 300,000. Gloria appropriately accounts for this contract under the percentage of completion
method. During 2021 Gloria incurred costs of P 700,000 related to the project, and the estimated cost of December 31,
2021, to complete the contract is P 1,400,000. Cabrera was billed P 500,000 under the contract.

The gross profit to be recognized by Gloria Inc. under the contract on December 31, 2021 is how much?

Problem 7
X Company uses the percentage of completion method of recognizing income. In 2020,
work was started on a P 18,000,000 job completed in 2021. Records in 2020 show the following:
Progress billing P 6,600,000
Cost incurred 5,400,000
Collections 4,200,000
Cost to complete 10,600,000

How much was the gross profit recognized in 2020?

How much is the gross profit to be recognized in 2021?

Problem 8
AAB Construction Company uses the percentage-of-completion method of accounting. In 2020 AAB began work under
contract #1348, which provided for a contract price of P20,000,000. Other details follows:
2020 2021
Cost incurred during the year P3,000,000 P15,750,000
Estimated costs to complete, as of December 31 12,000,000 -0-
Billing during the year 3,600,000 15,400,000
Collection during the year 2,500,000 15,500,000

The portion of the total contract price to be recognized as revenue in 2020 is how much?

Problem 9
BBC Construction Company uses the percentage-of-completion method of accounting for long term construction contracts.
In 2020, BBC started to erect a building for P10,500,000. The construction project was completed in 2021.
The following pertinent information were extracted from its accounting records:
2020 2021
Progress billings during the year P3,850,000 P6,650,000
Cost incurred during the year 3,150,000 6,300,000
Collected on billings during the year 2,450,000 8,050,000
Estimated cost to complete the project 6,300,000 -0-
How much income should BBC have recognized on this contract for the year ended 2020?

Problem 10
DJD Builders has a fixed price contract to build a waiting shed. The initial amount of revenue agreed is Php 528, 000. At
the beginning of the contract on January 1, 2018, the initial estimate of the constructions costs is Php 480, 000. By the end
of 2018 the estimate of the total costs has risen to Php 484, 800.

During 2019 the customer agrees to a variation with increases expected revenue from the contract by Php 12, 000 and
causes additional cost of Php 7, 200. At the end of 2019, there were materials stored on site for use during the following
period which cost Php 6, 000.

DJD builders have decided to determine the stage of completion of the contract by calculating the proportion that contract
costs incurred for work to date bear to the latest estimated total contract costs. The contract costs incurred at the end of the
year (cost incurred to date), billings and collections for each year were as follows:

Year Direct and allocable costs to date Billings Collections

2018 Php 126, 048 Php 144, 000 Php 120, 000
2019 370, 080 (including materials in store) 240, 000 228, 000
2020 492, 000 156, 000 192, 000

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LONG-TERM CONSTRUCTION CONTRACTS (SPECIAL REVENUE RECOGNITION) JLM
Required:
1. Compute the gross profit
a. Using percentage of completion (over-time) – cost-to-cost method
b. Using Cost recovery method (zero-profit) or point in time
2. Compute the due from/to customers
a. Using percentage of completion (over-time) – cost-to-cost method
b. Using Cost recovery method (zero-profit) or point in time

Problem 11
In 2018, Chicago Construction began work on a three-year construction project to build a new performing arts complex (the
“PAC”). The PAC contract price is Php 150 million. Chicago uses the percentage-of-completion method of accounting. At
the end of 2018, the following financial statement information indicates the results to date for the PAC:
Income statement
Revenue Php ? million
Cost of construction 35 million
Gross profit Php ? million

Balance Sheet
Accounts Receivable from construction building Php 14 million
Construction in Progress Php 50 million
Less: Billings on constructions (? Million)
Net billings in excess of construction in Progress Php ? million

Cash Flow Statement

Cash collections Php 46 million
Required:
Compute the following
1. Total revenue recognized in 2018
2. Billings on construction
3. Net in excess of construction in progress
4. Percentage of completion
5. Estimated remaining cost to complete

Problem 12
On January 1, 2018, Cleveland Enterprises obtained a contract to construct a building. It was estimated at the beginning of
the contract that it would take three years to complete the project at an expected cost of Php 200, 000. The contract price
was Php 250, 000. The following information describes the status of the job at the close of production each year:

2018 2019 2020

Actual cost incurred Php 110, 000 Php 120, 000 Php 15, 000
Estimated cost to complete 100, 000 20, 000 -0-
Billing on contract 125, 000 125, 000 -0-
Collections on contract 120, 000 120, 000 10, 000
Required: compute the following using. A. percentage of completion. B. cost recovery
1. Revenue recognized during the year
2. Gross profit during the year
3. CIP
4. Progress Billings
5. Net of CIP/Progress billings

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LONG-TERM CONSTRUCTION CONTRACTS (SPECIAL REVENUE RECOGNITION) JLM
MULTIPLE CHOICES PROBLEMS
In 2017, Calix Builders agreed to construct a commercial building at a price of P3,750,000. Calix Builders uses the
percentage of completion method. The information relating to the costs and billings for the contract were as follows:
2017 2018 2019
Cost incurred to date 1,050,000 2,250,000 2,943,750
Estimated costs to be incurred 1,950,000 750,000 -
Customer billings to date 562,500 1,500,000 3,750,000
Collection of billings to date 450,000 1,200,000 3,525,000
1. How much is the excess of construction in progress over progress billings or progress billings over construction in
progress in Calix’s December 31, 2018 balance sheet?
A. P1,312,500
B. P2,062,500
C. P750,000
D. P2,943,750

Jeremiah Co. is constructing a tunnel for 800 million. Construction began in 2016 and is estimated to be completed in 2021.
At December 31, 2018, MIAH has incurred costs totaling 356 million with 85 million of that incurred in 2018, 143 million in
2017, and the remainder during 2016. Jeremiah believes that it completed 30% of the tunnel during 2018, although that
may change based on future activity. Jeremiah Co. Uses PAS 11 for its accounting and regards its cost numbers as very
uncertain (cost recovery method).
2. What amount of revenue should Jeremiah Co. Recognize for the year ended December 31, 2018?
A. no revenue until 2021
B. 356 million
C. 240 million
D. 85 million

A construction contract has a fixed price contract for P100,000 to construct a building of a design that has never before
been constructed and using materials that have never before been used in the construction of building. The contractor
began construction of the building in 2018 and expects that construction will take at least five years. In 2018 the contractor
incurred P5,000 contract costs on the project. At the end of 2018 the contractor cannot estimate the outcome of the contract
with sufficient reliability to estimate the project’s percentage of completion (because of the uncertainties arising from the
new design and new materials the entity cannot estimate total expected contract costs with sufficient reliability). It is highly
likely that the contract price will be received from the customer.
3. At the end of 2018, how much revenue should be recognized by the contractor?
A. zero
B. 5,000
C. 100,000
D. cannot be determined

A construction contractor has a fixed price contract for P100 million to construct a building:
The contractor’s estimate of total contract costs is P60 million. It will take two years to construct the building. At the end of
the first year of the project (December 31, 2018):
(1) The contractor has incurred costs of P20 million on the contract, including P2 million on cement that is held offsite
(2) An independent surveyor certified that 28% of the contract work is completed
(3) The site was cleared (stipulated in the contract to constitute 10% of the total project), the foundation laid (stipulated
as 5% of the total project) and the walls of the building erected (stipulated as 14% of total project)
The contractor determines that the stage of completion of the construction contract is measured most reliably by reference
to the proportion that costs incurred for work performed to date bears to the estimated total costs.
4. At December 31, 2018, what is the stage of completion of the contract?
A. 33.33%
B. 30%
C. 29%
D. 28%

5. Assuming the same information above, and if the contractor determines that the stage of completion is measured most
reliably by reference to independent surveys of work performed, the stage of completion is:
A. 33.33%
B. 30%
C. 29%
D. 28%
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LONG-TERM CONSTRUCTION CONTRACTS (SPECIAL REVENUE RECOGNITION) JLM
6. Assuming the same information above, and if the contractor determines that the stage of completion is measured reliably
by reference to completion of physical proportion of the contract work:
A. 33.33%
B. 30%
C. 29%
D. 28%

A contractor entered into a construction contract on January 1, 2018. The contractor agrees to a fixed price of P9,000,000
to build a bridge. The contractor’s initial estimate of contract costs is P8,000,000. The contract expects that it will take three
years to build the bridge. The contractor uses calendar year. By the end of the first year of the contract, the contractor’s
estimate of total costs has increased to P8,050,000 (costs incurred in 2018 amounted to P2,093,000).

In 2019 the customer and contractor agree to a variation resulting in an increase in contract revenue of P200,000 and
estimated additional contract costs of P150,000. At the end of 2019, costs incurred of P4,075,000 include P100,000 paid
for standard materials stored at the site to be used in 2018 to complete the project.

The contractor determines the stage of completion of the contract by calculating the proportion that contract costs incurred
for work performed to date bear to the latest estimated total contract costs.
7. Determine the revenue, expenses and profit for 2019:
Revenue Expense Profit
A. 4,468,000 3,975,000 493,000
B. 2,340,000 2,093,000 247,000
C. 5,071,000 4,075,000 503,000
D. 4,568,000 4,075,000 493,000

8. Using same information above, determine the revenues, expenses and profit in 2020:
Revenue Expense Profit
A. 4,468,000 3,975,000 493,000
B. 2,340,000 2,093,000 247,000
C. 2,392,000 2,132,000 260,000
D. 2,592,000 2,032,000 497,000

A construction contractor has a fixed price contract for P100,000 to construct a building. The contractor’s initial estimate of
total contract costs is P60,000. It will take two years to construct the building. At the end of the first year of the project
(December 31, 2018), the contractor has incurred costs of P20,000 on the contract, including P2,000 on cement that is held
offsite. The entity’s estimate of total contract costs has stayed the same. The contractor determines the stage of completion
by cost-to-cost method.
9. Determine the revenue, expenses and profit in 2018:
Revenue Expenses Profit
A. 30,000 18,000 12,000
B. 32,000 20,000 12,000
C. 31,333 18,000 13,333
D. 33,333 20,000 13,333

MIAH Construction has used the cost-to-cost method of percentage of completion. The following are available relating to a
recently completed building project with fixed price of P2,000,000
2017 2018 2019
Gross profit (loss) 75,000 140,000 (20,000)
Cost incurred 360,000 ? 820,000

10. What was the estimated cost to complete the project at the end of 2018?
A. 656,667
B. 985,000
C. 1,641,667
D. none of the choices

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