AFAR

13 CONSTRUCTION CONTRACTS

STRAIGHT PROBLEMS

Exercise 1 Profitable Project 20x3 20x4 20x5

The SOLID CONSTRUCTION COMPANY has a 3-year Costs
contract to construct a bridge. The contract price is incurred
P5,600,000. The following data pertain to the construction each year P1,843,200 P1,603,584 2,374,656
period. Estimated
20x1 20x2 20x3 cost to
Cost to date P1,512,000 4,032,000 4,536,000 complete 3,072,000 2,297,856 0
Estimated cost to Billings to
complete 3,528,000 448,000 - customer
Progress billings each year 1,935,360 1,751,040 1,843,200
each year 2,240,000 2,240,000 1,120,000 Cash
Collections of collected 1,843,200 1,658,880 2,027,520
billings each year 1,960,000 2,240,000 1,400,000
Diversified uses cost-to-cost percentage of completion
The company uses cost-to-cost percentages in measuring method.
progress to satisfying performance obligation.
Required.
Required: 1. Compute the Revenue, cost, and gross profit or loss
1. Calculate revenue, cost, and gross profit recognized each year.
each year-end. 2. Determine the balance sheet presentation of the
2. Determine the balance sheet presentation of this contract at the ends of 20x3 and 20x4.
contract at ends of 20x1 and 20x2. 3. Prepare all the necessary journal entries.
3. Prepare all journal entries each year.
Exercise 3.
Exercise 2 Cost of fulfilling contract exceeds contract Tripartite Construction Company began operations in 2020.
price Construction activity for the first year follows:
On January 1, 20x3, DIVERSIFIED CONSTRUCTION Contract Billings Collections Act. cost Addl cost
CORPORATION entered into a 3-year contract to build a Proj Price to date to date to date to compl
dam. The required contract price is P5,529,600 and the A 560,000 360,000 340,000 450,000 150,000
estimated cost is P4,915,200. The following cost data B 670,000 220,000 210,000 126,000 504,000
relate to the construction activities. C 520,000 520,000 520,000 330,000 0

Required:
1. Calculate the revenue, costs and profit/loss
for 2020.
2. Present the balance sheet at the end of 2020.

MULTIPLE CHOICE

1. On January 1, 20x1, an entity accepted a long-term b. Loss of P1.0 million (expensed immediately)
construction project to build a condominium at a fixed c. No profit or loss in the year and deferring it to
contract price of 140 million. The outcome of second year
performance obligation in connection with this contract d. Since 60% is the percentage of completion,
cannot be measured reasonably as of year-end. The recognize 60% of loss (i.e., P0.6 million)
following data are provided by the accountant and
project manager: 3. Brilliant Inc. is constructing a skyscraper in the heart
of town and has signed a fixed price two-year contract
Estimated cost to complete construction project as of for P21.0 million with the local authorities. It has
January 1, 20x1, 90,000,000 incurred the following cost relating to the contract by
Actual costs incurred as of December 31, 20x1, the end of first year:
P45,000,000 • Material cost P5 million
• Labor cost P2 million
• Construction overhead P2 million
How much is entity’s gross profit for the year ended
• Marketing costs P0.5 million
December 31, 20x1?
• Depreciation of the idle plant
a. 30,000,000 c. 25,000,000 and equipment P0.5 million
b. 10,000,000 d. 0
2. Lazy Builders Inc. has incurred the following contract At the end of the first year, it has estimated cost to
costs in the first year on a two-year fixed price complete the contract = P9 million
contract for 4.0 million to construct a bridge What profit or loss from the contract should Brilliant
• Material cost P2 million Inc. recognize at the end of the first year?
• Other contract costs (including a. P1.5 million (9/18 x 3.0)
• site labor costs) P1 million b. P1.0 million (9/18 x 2.0)
• Cost to complete P2 million c. P1.05 million (10/19 x 2.0)
d. P1.28 million (9.5/18.5 x 2.5)
How much profit or loss should Lazy Inc. recognize in
the first year of the three-year construction contract? 4. Mediocre Inc. has entered into a very profitable fixed
a. Loss of P0.5 million prorated over two years price contract for contracting a high-rise condominium

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 building over a period of three years. It incurs the The company uses cost to cost percentages in
following costs relating to the contract during the first measuring satisfaction of performance obligations.
year:
• Cost of material P2.5 million 6. Revenue earned from the contract in 2018
• Site labor costs P2.0 million a. P1.6 m c. P 1.76 m
• Agreed administrative costs as b. P1.8 m d. P 1.67 m
per contract to be reimbursed 7. Gross profit realized for 2019 is
by the customer P1 million a. P576,000 c P1,126,400
• Depreciation of the plant used b. P550,400 d. P 480,000
for the construction P0.5 million
• Marketing costs for selling
apartments when they are ready P1.0 million 8 Revenue earned in 2020 is
Total estimated cost of the project = P18 million a. P 5.12 m c. P3.52 m
b. P 2.88 m d. P8.00 m
The percentage of completion of this contract at the .
year-end is
a. 33 1/3% (=6.0/18.0) c. 25% (= 4.5/18.0)
b. 27% (= 4.5/16.5) d. 39% (=7.0/18) 9. On January 2, 20x5, QUICKBUILD ERECTORS entered
into contract to construct two projects. The following data
5. In November 20X2, an entity contracts with a relate to the construction activities.
customer to remodel a 3-storey building and install Project A Project B
new elevators for total consideration of CU5 million. Contract Price 420,000 310,000
The promised refurbishment service, including the Cost incurred during 2019 240,000 280,000
installation of elevators, is a single performance Estimated cost to complete 120,000 40,000
obligation satisfied over time. Total expected costs are Billed to customers during
CU4 million, including CU1.5 million for the elevators. 2019 150,000 270,000
A summary of the transaction price and expected costs Received from customers
is as follows during 2019 120,000 250,000
Transaction price 5.0m
Expected costs: What amount of gross profit should QUICKBUILD
Elevators 1.5m ERECTORS report in its 20x5 income statement?
Other costs 2.5m a. ₱40,000 c. ₱30,000
Total expected costs 4.0m b. ₱31,250 d. None of the choices

The customer obtains control of the elevators when 10. CIGNAL ERECTORS began operations on January 2,
they are delivered to the site in December 20X2, 20x5. During the year, the company entered into a
although the elevators will not be installed until June contract with TEAM Company to construct a
20X3. The entity is not involved in designing or manufacturing facility. At that time CIGNAL estimated
manufacturing the elevators. that it would take five years to complete the facility at a
cost of P3,937,500. The total contract price for the
The entity uses an input method based on costs
construction of the facility is P5,468,750. During the year,
incurred to measure its progress towards complete
the company incurred P962,500 in construction costs
satisfaction of the performance obligation.
related to the construction project. The estimated cost to
As of 31 December 20X2, the total costs incurred complete the contract is P3,412,500. TEAM was billed and
(excluding elevators) is CU500,000. paid 30% of the contract price subject to a 10% retention
payable together with the last billing after a third party
What is the revenue recognized from this contract?
inspected the manufacturing facility.
a. 2.2M c. None
b. 2.5M d. Some other amount
Using the percentage of completion method, how is the
contract presented in the Balance Sheet?
Rainbow Inc has a P8 million contract started in 2018.
a. P273,437 (contract liability)
The following information is provided for the
b. P273,437 (Contract asset)
construction activities.
c. P437,500 (Contract asset)
Years Actual cost to date Addl cost to complete
d. P437,500 (Contract liability)
2018 P1,024,000 P4,096,000
2019 3,993,600 2,246,400
2020 6,473,600 0

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