Nanyang Technological University

Nanyang Business School

AC2101 – Accounting Recognition and Measurement

Semester 1, 2017-18

Outline for Seminar 19:

FRS 115 - Application to Construction Contracts

Learning objectives:

 Understand and apply the revenue recognition, measurement and disclosure issues
relating to construction contracts under FRS 115

Required readings:

 FRS 115 Revenue from Contracts with Customers (including Illustrative Examples)
 Amendments to FRS 115 Clarifications to FRS 115 Revenue from Contracts with
Customers (2016)
 Picker Chap 4
 Attached illustrations

Write-ups and illustrations:

Note: Please fill in the missing blanks in the attached illustrations

Illustration 1 (with Team Activity)

In 20x3, A Ltd enters into a contract (Project A) to build an overhead bridge. The project
is expected to be completed in 20x4. The contract price is $1,000,000 and the other data
pertaining to the project during the construction period are as follows:

20x3 20x4
$'000 $'000

Actual costs for the year 600 220

Estimated costs to complete 200 -
Billings for the year 400 600
Collections for the year 300 700

A Ltd has also entered into another contract (Project B) to build a stretch of road in 20x1.
The project is expected to be completed in 20x4. The contract price is $6,000,000 and the
other data pertaining to the project during the construction period are as follows:

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 20x1 20x2 20x3 20x4
$'000 $'000 $'000 $'000

Costs to date 900 2,750 4,620 6,500

Estimated costs to complete 4,100 2,750 1,980 -
Billings to date 800 2,000 4,500 6,000
Collections to date 600 1,600 3,300 5,500

In 20x3, A Ltd enters into another contract (Project C) to build an expressway. The project
is expected to be completed in 3 years, i.e. by 20x5. The contract price is $15,000,000.
The current costs incurred in 20x3 are $5,000,000. The additional costs to complete the
expressway cannot be estimated reliably. The progress billings and cash collected in 20x3
is $4,000,000. No other information is provided.

A Ltd adopts the "percentage of completion" method in accounting for construction

contracts and uses the cost-to-cost basis as a measure of the stage of completion.

Required

(a) Record the transactions for Project A for both 20x3 and 20x4 with journal entries.

(b) Record the transactions for Project B for 20x1 to 20x4 with journal entries.

(Seminar 19 Team Activity - As a team, complete the table needed to prepare the
journal entries for Illustration 1 Project B – 20x1, 20x2 and 20x4.)

(c) Record the transactions for Project C for 20x3 with journal entries.

Project A

Project A – 20x3

(a) Incurrence of Cost

Dr Construction in progress 600
Cr Cash, payroll payable, etc. 600
(to record cost of construction incurred to CIP account)

(b) Progress Billings

Dr Account receivable 400
Cr Progress billings 400
(to record progress billings made)

(c) Cash Collection

Dr Cash 300
Cr Account receivable 300
(to record cash collection)

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 (d) End of Each Accounting Period

Step 1: Check the overall profitability of the contract:

20X3 20X4
$’000 $’000
Contract Price 1,000 1,000
Less: Estimated Total Cost (800) (820)
Estimated Total Profit/Loss 200 180

Step 2: Compute the Percentage of Completion:

Percentage of Completion 20X3 20X4

20X3: 600/800*100% 75%
20X4: 820/820*100% 100%

Step 3: Compute the Construction Profit/(Loss) for the current period

Cumulative to Date $’000 $’000

20X3: 75%*200 150
20X4: 100%*180 180
Less: Previously Recognised - (150)
For Current Period 150 30

Step 4: Compute the Construction Revenue Earned for the current period

Cumulative to Date $’000 $’000

20X3: 75%*1,000 750
20X4:100%*1,000 1,000
Less: Previously Recognised - (750)
For Current Period 750 250

Step 5: Compute the Construction Cost for the current period

Cumulative to Date $’000 $’000

20X3: 75%*800 600
20X4: 100%*820 820
Less: Previously Recognised - (600)
For Current Period 600 220

Note the bold numbers above:

Dr Construction costs 600
Dr Construction in progress 150
Cr Construction revenue 750
(to recognise construction profit in the P/L)

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Project A – 20x4

(a) Incurrence of Cost

Dr Construction in progress 220
Cr Cash, payroll payable, etc. 220
(to record cost of construction incurred to CIP a/c)

(b) Progress Billings

Dr Account receivable 600
Cr Progress billings 600
(to record progress billings made)

(c) Cash Collection

Dr Cash 700
Cr Account receivable 700
(to record cash collection)

(d) End of Each Accounting Period

Dr Construction costs 220
Dr Construction in progress 30
Cr Construction revenue 250
(to recognise construction profit in the P/L)

Project A – Completion of Project

Check: CREDIT BALANCE on Progress Billings (SFP) = $1,000,000

Check: DEBIT BALANCE on CIP (SFP) = $1,000,000

(e) At the end of the contract

Dr Progress Billings 1,000

Cr Construction in progress 1,000
(to close off the accounts upon completion of contract)

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 Project B (Team Activity)

Project B – 20x1

(a) Incurrence of Cost

Dr Construction in progress
Cr Cash, payroll payable, etc.
(to record cost of construction incurred to CIP a/c)

(b) Progress Billings

Dr Account receivable
Cr Progress billings
(to record progress billings made)

(c) Cash Collection

Dr Cash
Cr Account receivable
(to record cash collection)

(d) End of Each Accounting Period

Step 1: Check the overall profitability of the contract:

20X1 20X2 20X3 20X4

$’000 $’000 $’000 $’000

Contract Price 6,000 6,000 6,000

Less: Estimated Total

(5,000) (5,500) (6,600)
Cost
Estimated Total (600) –
Profit/Loss 1,000 500
Loss

Step 2: Compute the Percentage of Completion:

Percentage of Completion 20X1 20X2 20X3 20X4

20X1: 900/5000*100% 0.18

20X2: 2750/5500*100% 0.50

20X3: 4620/6600*100% 0.70

20X4:

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Step 3: Compute the Construction Profit/(Loss) for the current period

Cumulative to Date $’000 $’000 $’000 $’000

20X1: 18%*1,000 180
20X2: 50%*500 250

20X3: 70%*(600) (420)

20X4:

Less: Previously
- (180) (250)
Recognised

For Current Period 180 70 (670)

Step 4: Compute the Construction Revenue Earned for the current period

Cumulative to Date $’000 $’000 $’000 $’000

20X1: 18%*6,000 1,080
20X2: 50%*6,000 3,000
20X3: 70%*6,000 4,200
20X4:
Less: Previously
- (1,080) (3,000)
Recognised
For Current Period 1,080 1,920 1,200

Step 5: Compute the Construction Cost for the current period

Cumulative to Date $’000 $’000 $’000 $’000

20X1: 18%*5,000 900
20X2: 50%*5,500 2,750
20X3: 70%*6,600 4,620
20X4:
Less: Previously
- (900) (2,750)
Recognised
For Current Period 900 1,850 1,870

Note the bold numbers above:

Dr Construction costs
Dr Construction in progress
Cr Construction revenue
(to recognise construction profit in the P/L)

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Project B – 20x2

(a) Incurrence of Cost

Dr Construction in progress
Cr Cash, payroll payable, etc.
(to record cost of construction incurred to CIP a/c)

(b) Progress Billings

Dr Account receivable
Cr Progress billings
(to record progress billings made)

(c) Cash Collection

Dr Cash
Cr Account receivable
(to record cash collection)

(d) End of Each Accounting Period

Note the bold numbers above:
Dr Construction costs
Dr Construction in progress
Cr Construction revenue
(to recognise construction profit in the P/L)

Project B – 20x3

(a) Incurrence of Cost

Dr Construction in progress 1,870
Cr Cash, payroll payable, etc. 1,870
(to record cost of construction to CIP a/c)

(b) Progress Billings

Dr Account receivable 2,500
Cr Progress billings 2,500
(to record progress billings made)

(c) Cash Collection

Dr Cash 1,700
Cr Account receivable 1,700
(to record cash collection)

(d) End of Each Accounting Period

Note the bold numbers above:
Dr Construction costs 1,870
Cr Construction in progress 670
Cr Construction revenue 1,200
(to recognise construction loss in the P/L)

Dr Loss due to onerous contract 180

Cr Provision due to onerous contract 180

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Project B – 20x4

(a) Incurrence of Cost

Dr Construction in progress
Cr Cash, payroll payable, etc.
(to record cost of construction to CIP a/c)

(b) Progress Billings

Dr Account receivable
Cr Progress billings
(to record progress billings made)

(c) Cash Collection

Dr Cash
Cr Account receivable
(to record cash collection)

(d) End of Each Accounting Period

Note the bold numbers above:
Dr Construction costs
Cr Construction in progress
Cr Construction revenue
(to recognise construction loss in the P/L)

Dr Provision for onerous contract

Cr Close out of Provision for onerous contract

Project B – Completion of Project

Check: CREDIT BALANCE on Progress Billings (SFP) =

Check: DEBIT BALANCE on CIP (SFP) =

(a) At the end of the contract

Dr Progress Billings
Cr Construction in progress
(to close off the accounts upon completion of contract)

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 Project C
Project C – 20x3

(a) Incurrence of Cost

Dr Construction in progress 5,000
Cr Cash, payroll payable, etc. 5,000
(to record cost of construction to CIP a/c)

(b) Progress Billings

Dr Account receivable 4,000
Cr Progress billings 4,000
(to record progress billings made)

(c) Cash Collection

Dr Cash 4,000
Cr Account receivable 4,000
(to record cash collection)

(d) End of Each Accounting Period

Note the Bold numbers above:

Dr Construction costs 5,000

Cr Construction revenue 5,000
(to recognise construction profit in the P/L – in this case, $0 profit)