PRACTICAL ACCOUNTING II

P2.1406- Long Term Construction Contracts

1. STRONG CONSTRUCTIONS uses the percentage of completion method in

recognizing income. In 2010, STRONG was engaged by SM on a fixed-price-
contract to build a 4-storey shopping mall.

On January 1, 2013, a fire damaged the accounting records of STRONG

CONSTRUCTIONS. The president of the company has contracted you to reconstruct
the contract information.

The following data were taken from the salvaged files:

December 31
Architect’s estimated total
cost of completion,
Cost incurred
Percentage of completion
income recognized to date

Compute for the percentage completed in 2011 on the SM shopping mall.

a. 40% c. 20%
b. 25% d. 30%

On January 2, 2013, QUICKBUILD ERECTORS entered into contract to construct two

projects. The following data relate to the construction activities.
Project A Project B
Contract price P 1, 181, 250 P 843, 750
Cost incurred during 2013 675, 000 787, 500
Estimated costs to complete 337, 500 196, 875
Billings to customer 421, 875 759, 375

2. What amount of gross profit should QUICKBUILD ERECTORS report in its 2013
income statement under the following methods?
Percentage of Zero Profit
Completion Method Method
a. P 0 P (112, 500)
b. P (140, 625) P (28, 125)
c. P (28, 125) P 0
d. P (28, 125) P (140, 625)

3. BETTER – METHOD CONSTRUCTION, INC. recognizes construction revenue

and costs using the percentage of completion method. During 2012, a single long-
term project was begun which continued through 2013. Information on the project
follows:
 2012 2013
Accounts receivable P 437, 500 P 1, 312, 500
Incurred costs during year 459, 375 840, 000
Construction in progress 533, 750 1, 592, 500
Billings on contract 437, 500 1, 837, 500
The construction accounts are at amounts to-date.

What is the gross profit recognized from this long term contract?
2012 2013
a. P 96, 250 P 997, 500
b. 96, 250 437, 500
c. 74, 375 560, 000
d. 74, 375 218, 750

CIGMA ERECTORS began operations on January 2, 2013. During the year, the
company entered into a contract with TEAM Company to construct a manufacturing
facility. At that time CIGNAL estimated that it would take five years to complete the
facility at a cost of P4, 921, 875. The total contract price for the construction of the
facility is P 6, 835, 937.50. During the year, the company incurred P 1, 203, 125 in
construction costs related to the construction project. The estimated cost to complete
the contract is P 4, 265, 625. TEAM was billed and paid 30% of the contract price
subject to a 10% retention.

4. Using the percentage of completion method, how much is the excess of

Construction in Progress over Contract Billings or Contract Billings over
Construction in Progress?
a. P 341, 796.87 (current liability)
b. P 341, 796.87 (current asset)
c. P 546, 875 (current asset)
d. P 546, 875 (current liability)
DESTINY CONSTRUCTIONS, INC. started work on three job sites during 2013. The
following data pertain to the three jobs at the end of 2013.

Site Contract Price Costs Incurred Est.cost Billings on Collections

to Complete Contract on Contract
Mla. P 656, 250 P492, 187.50 - P 656, 250 P 656, 250
Cebu 918, 750 555, 600.00 P 370, 400 500, 000 500, 000
Dvo. 328, 125 131, 250.00 131, 250 196, 875 131, 250
Totals 1, 903, 125 1, 179, 037.50 501, 650 1, 353, 125 1, 287, 500

5. On the balance sheet as of the end of 2013, the amount of Construction in Progress
net of Progress Billings OR the amount of Progress Billings net of Construction in
Progress to be reported using:
% of Completion Zero Profit Method
a. P 15, 537.50 current asset P 17, 275 current liability
b. P 15, 537.50 current liability P 17, 275 current asset
c. P 15, 537.50 current liability P 17, 275 current liability
d. P 15, 537.50 current asset P17, 275 current asset

6. On the income statement for the year ended December 31, 2013 the realized gross
profit or (loss) using:
% of Completion Zero Profit Method
a. P192, 525 P164, 062.50
b. P 189, 625 P 156, 812.50
c. P 196, 875 P (164, 062.50)
d. P (189, 625) P (156, 812.50)

THE SKYVIEW CORPORATION started work on three contracts during 2013. Data
relating to the three jobs are:
Contract Price Costs Incurred Est cost Billings
Collections
to on on
complete contract contract
Contract 1 P500, 000 P375, 000 - P500, 000 P400, 000
Contract 2 700, 000 100, 000 400, 000 100, 000 50, 000
Contract 3 250, 000 100, 000 100, 000 - -

7. Calculate the amount of Construction in Progress to be reported in the year-end

balance sheet under percentage of completion.
a. P165, 000 c. P 575, 000
b. P 265, 000 d. P 785, 000

RAINBOW, INC., a construction company, has a P10, 000, 000 contract that was
started in 2011. The following information is provided for the construction activities.

Construction Actual Cost Est cost to complete

Years incurred to-date at year-end
2011 P1, 280, 000 P 5, 120, 000
2012 4, 992, 000 2, 808, 000
2013 8, 092, 000 0

8. Calculate the amount of gross profit to be reported for 2012 under percentage of
completion method.
a. P 1, 408, 000 c. P 720, 000
b. P 688, 000 d. P 600, 000
Answers:

1. C
2. D
3. D
4. D
5. A
6. B
7. B
8. B