DIVINE WORD COLLEGE OF LEGAZPI

SCHOOL OF BUSINESS, MANAGEMENT, AND ACCOUNTANCY

ADVANCED FINANCIAL ACCOUNTING AND REPORTING

Construction Contracts

Elmer Construction uses the percentage-of-completion method for long-term construction contracts.
A specific job was begun in 2020 and completed 2022. The contract price was 14,000,000 and cost
information as of each year-end is given as follows:

2020 2021 2022

End of year estimated 4,000,000 2,000,000 -
cost to complete
Annual cost incurred 4,000,000 4,000,000 1,200,000

1. Assuming Elmer correctly recorded gross profit in 2020, how much gross profit should the
company record in 2021?

a. 200,000
b. 1,600,000
c. 3,000,000
d. 3,200,000

On July 1, 2020, NORTH CONSTRUCTION CORPORATION contracted to build office building for
SM Inc, for a total contract price of P 2,950,000. Estimated total contract cost is P 2,600,000. Cost
incurred to date related to the project are as follows

Cost of direct material used 200,000

Cost of direct labor, including supervision
150,000
of P 50,000
Cost of indirect materials used 55,000
Cost incurred in obtaining the
70,000
contract previously Written off
Depreciation of equipment used on the project 120,000
Payroll design and technical department
80,000
allocated To the contract
Insurance cost (2/3 for other project) 180,000
Costs of contracted research and development 105,000
Depreciation of idle equipment
60,000
not used on a particular Contract
Selling costs 45,000
General and administrative expenses
specifically included Under 30,000
the term of the contract
Borrowing cost incurred during
130,000
the construction period
Advances made to subcontractors 100,000

2. Using the percentage of completion method, what is the realized gross profit to be
recognized for 2020?
A. P 125,195 C. P 111,055
B. P 104,335 D. P 134,610
(Construction contract - Percentage of Completion Method)

On January 1, 2020, Solid Company accepted a long-term construction project for an initial contract
price of P1,000,000 to be completed on June 30, 2022. On January 1, 2021, the contract price was
increased to P1,500,000 by reason of change in the design of the project. The outcome of the
construction contract can be estimated reliably. The project was completed on December 31, 2022
which resulted to penalty amounting to P200,000. The entity provided the following data concerning
the direct costs related to the said project for 2020 and 2021:

2020 2021

Costs during the year 440,000 680,000

Remaining estimated costs to complete at year-end 660,000 280,000

3. What is the construction revenue for the year ended December 31, 2020?

a. 340,000
b. 400,000
c. 440,000
d. 360,000

4. What is the realized gross profit for the year ended December 31, 2021?

a. 200,000
b. 80,000
c. 180,000
d. 100,000

5. What is the balance of construction in progress on December 31, 2021?

a. 1,200,000
b. 1,020,000
c. 1,120,000
d. 900,000

Construction contract - Cost Recovery Method)

On January 1, 2020, Hardrock Company started the construction of a building at a fixed contract
price of P1,000,000. On the same date, the customer paid a mobilization fee equal to 5% of contract
price that will be deductible from the first billing. The outcome of construction contract cannot be
estimated reliably

During 2020, the entity billed the customer equivalent to 30% of the contract price. During 2021, the
entity billed again the customer amounting to 20% of the contract price. During 2022, the entity
billed again the customer amounting to 40% of the contract price. The remaining billing was made at
the year of completion of the project.

The entity made collection from the customer at the end of 2020, 2021 and 2022, in the amount of
P120,000, P450,000 and P180,000, respectively. The entity provided the following data concerning
the direct costs related to the said project:

2020 2021 2022

Cumulative costs incurred at year-end 360,000 800,000 870,000

Remaining estimated costs to complete at year-end 840,000 250,000 50,000

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6. What is the realized gross profit for the year ended December 31, 2021?

a. 50,000
b. 200,000
c. 150,000
d. 0

7. What is the excess of construction in progress over progress billings or excess of progress billings
over construction in progress on December 31, 2022?

a. 30,000 excess billings

b. 80,000 excess billings
c. 20,000 excess construction in progress
d. 50,000 excess construction in progress

8. What is the balance of accounts receivable on December 31, 2022?

a. 150,000
b. 100,000
c. 120,000
d. 50,000

In 2020, DK Builders Construction agreed to construct an apartment building at a price of

P2,000,000. The information relating to the cost and billings for the contract is as follows:

2020 2021 2016

Cost incurred to date 560,000 1,200,000 1,570,000
Estimated costs yet to 1,040,000 400,000 0
be incurred
Customer billings each 750,000 560,000 690,000
year
Collection of billings 560,000 640,000 700,000
each year
The outcome of the construction contract can be estimated reliably.

9. In its December 31, 2020 Statement of Financial Position, the company would report:

a. The current asset, costs and profits in excess of billings (gross amount due from customer),
50,000
b. The current liability, billings in excess of cost and profits (gross amount due to customers),
50,000
c. The current asset, contract amount in excess of billings, 1,250,000
d. The current asset, deferred profit of 290,000

10. In its December 31, 2021 Statement of Financial Position, the company would report:

a. The current asset, cost and profits in excess of billings (gross amount due from customers),
190,000
b. The current liability, billings in excess of costs and profits (gross amount due to customer),
190,000
c. The current asset, contract amount in excess of billings, of 690,000
d. The current asset, deferred profit of 130,000

11. In its December 31, 2022 Statement of Financial Position, the company would report in relation
to the Construction in Progress and Contract Billings account:

a. The current asset, 2,000,000

b. The current liability, 2,000,000
c. The Construction-in-Progress Account of 2,000,000 and Contract billings of 1,570,000
d. None

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Theory

1. Contract revenue in construction contract comprises

a. The initial amount of revenue agreed in the contract

b. Variation in contract work, claim and incentive payment
c. The initial amount of revenue agreed in the contract, variation in contract work, claim and
incentive payment
d. The initial amount of revenue agreed in the contract and progress billings

2. Contract costs of a construction contract comprise all of the following, except

a. Costs that directly relate to the specific contract

b. Costs that are attributable to contract activity in general and can be allocated to the contract
c. Such other costs that are specifically chargeable to the customer under the terms of the
contract
d. General administration costs for which reimbursement is not specified in the contract

3. Which of the following costs shall not form part of contract costs of long-term construction
contract?

a. Depreciation of idle plant and equipment not used on a particular contract

b. Costs of materials used in construction
c. Costs of moving plant, equipment and materials to and from the contract site
d. Site labor costs, including site supervision

4. Which of the following costs shall form part of contract costs of long-term construction contract?

a. General administration costs for which reimbursement is not specified in the contract
b. Selling costs such as broker’s commission
c. Research and development costs for which reimbursement is not specified in the contract
d. Construction overheads including costs such as the preparation and processing of
construction personnel payroll

5. Which of the following costs should be included in contract costs?

a. Project manager’s costs

b. Destruction of an existing building
c. Restoration of an old factory
d. All of these are included in contract costs

6. The percentage of completion of a construction is based on all of the following, except

a. The proportion that contract costs incurred for work performed to date bear to the estimated
total contract costs
b. Survey of work to be performed
c. Completion of physical proportion of the contract work
d. Progress payments and advances received from customers

7. Which statement is true when the outcome of construction contract cannot be estimated reliably?

a. Revenue shall be recognized only to the extent of contract costs incurred that is probable will
be recoverable
b. Contract costs shall be recognized as an expense in the period when incurred
c. An expected loss on the construction contract shall be recognized as an expense immediately
d. All of the statements are true

8. An entity shall disclose all of the following in relation to a construction contract, except

a. The method used to determine the stage of completion

b. The method used to determine the contract revenue recognized in the period

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 c. Advances received in cash, analyzed according to each material contract
d. Total amount of contract revenue to be recognized in the period

9. The gross amount due from customers presented as an asset is equal to

a. Costs incurred plus recognized profit

b. Costs incurred less recognized profit
c. Costs incurred plus recognized profit less the sum of recognized loss and progress billings
d. Costs incurred plus the sum of recognized profit and progress billings

10. In selecting an accounting method for a long-term construction contract, the principal factor to be
considered should be

a. The terms of payment in the contract

b. The degree to which a reliable estimate of the progress toward contract completion is
practicable
c. The method commonly used by the contractor to account for other long-term construction
contracts
d. The inherent nature of the contractor’s technical facilities used in construction

11. In accounting for a long-term construction contract using the percentage of completion method,
the amount of income recognized in any year would be added to

a. Deferred revenue
b. Progress billings on contracts
c. Construction in progress
d. Property, plant and equipment

12. When it is probable that total contract costs on a fixed price contract will exceed the total
revenue, the expected loss should be

a. Set off against profit on other contracts

b. Recognized as expense immediately unless revenue to date exceeds costs to date
c. Apportioned to the years of the contract according to the stage of completion
d. Recognized as an expense immediately

13. In accounting for a long-term construction contract using the percentage of completion method,
the progress billings on contracts account is a

a. Contra current asset account

b. Contra noncurrent asset account
c. Noncurrent liability account
d. Revenue account

14. Which of the following projects undertaken by an entity should be accounted for as a construction
contract?

a. An item of plant and machinery being constructed to be sold as inventory

b. An office block being constructed as an investment property
c. A warehouse being constructed for the entity’s own use
d. A large boat being constructed for a third party under a specifically negotiated contract

15. A construction entity signed a contract to build a theatre over a period of two years and with this
contract also signed a maintenance contract for five years. Both contracts are negotiated as a single
package and closely related to each other. The two contracts should be

a. Combined and treated as a single contract

b. Segmented and considered two separate contracts
c. Recognized under cost recovery method
d. Treated differently, the building contract under cost recovery method and the maintenance
contract under the percentage of completion

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16. All of the following could be valid reasons why the expected revenue from a fixed price
construction contract should be increased from the original price, except

a. The total costs in the contract have increased and the contract includes cost escalation clause
b. The contractor has incurred additional costs due to errors made by the employees
c. The contractor has agreed variations to the contract with the client
d. The contractor would receive an incentive payment if work continues ahead of schedule and
it is probable that specified performance standards are met or exceeded

17. The percentage of completion method must be used when certain conditions exist. Which of the
following is not one of the conditions?

a. Estimates of progress toward completion can be estimated reliably

b. Total contract revenue and contract costs can be measured reliably
c. The client can be expected to satisfy some of the obligations under the contract
d. Is its probable that the economic benefits associated with the contract will flow to the entity

18. If an entity cannot estimate reliably the outcome of a construction contract, revenue shall be
recognized

a. Straight line over the period of the service contract

b. By using the percentage of completion method based on costs incurred compared to total
estimated costs
c. By recording an equal amount of revenue for each service performed
d. Only to the extent of the costs recoverable

19. How should earned but unbilled revenue on a long-term construction contract be disclosed if the
percentage of completion method is used?

a. As construction in progress under current assets

b. As construction in progress under noncurrent assets
c. As a receivable under noncurrent assets
d. In a note to financial statements

20. How should the balances of progress billings and construction in progress be reported prior to the
completion of a long-term construction contract?

a. Progress billings as deferred revenue and construction in progress as deferred expense

b. Progress billing as revenue and construction in progress as inventory
c. Net, as current asset if debit balance, and current liability if credit balance
d. Net, as income from construction if credit balance, and loss from construction id debit
balance

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