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    Constraction Constracts p2 PDF

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    pamela dequillamorte

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    © All Rights Reserved
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    of 25
    to the Examinees: rominent difference between IAS and US FASB is that IAS No, 11. does not b ted-contract iGions of IAS No. 11, the percentoge of completion Should be ceed uhenevek the outcome, ofa conetruc; ‘Hor ble, a zero-profit ‘iably estimated. In those oo fr oe elves recog: t 1 amount of coste incurred during the period so zed. But as goon as the ultimate outcome of 4 rt tice < eof ied; the i Prenues and confereedpntce eel Gpmbleton eth 3 Ge NE, computing recognized for the current period. This deviation was not yet ject of IASB-FASB (refer to Chapter 8 and I Notes tothe Heomincen ene Project of 1. Mediocre Ine: bas. entered into a very profitable fixed price contract for constructing followin 8 = z £ 8 5s 2 Ss 5 ’y 8 8 a high-rise buil “i e incurs cae foe contract deg oerg ater of hee years eincure the followin : Cost of material=P2.5 million ‘ite labor co: P2.0 million Agreed administrative costs as per contract to be reimbursed by the customer = P1 million. : a epreciation of the plant used for the construction = P0.5 raat ton. PLO Marketing costs for selling apartments, when they are ready = P 2: ion. Total estimated cost of the project = P18 million. The percentage of completion of this contract-at the year-end is: a. 33 1/3% (=6.0/18.0) c. 25% ie 4.5/18.0) b. 27% (= 4.5/16.5) d. 39% (=7.0/18) 2. Miracle Construkt, Inc. is executing a gigantic project of constructing the tallest boarding house in the country. The project is expected to take three years to complete. The company has signed a fixed price contract of P12,000,000 for the construction of this perstigious boarding house. The details of the costs incurred to date in the first year are: Site labor costs .... P1,000,000 Costs of construction material 000,000 Depreciation of special plant and equipment used in constructing to build the boarding house ... 500,000 Marketing and selling costs to get the boarding house in the country the right exposure ....... .- _1,000,000 ‘Total contract cost estimated to complete P5,500,000 ew as AL ; a, at © i, AES, i 4 2 ¢ b 4 IE 2.8 2 aor % a 18 3. é a iu. tg c 8, bd 15 b = a d oY 16.0 a 26. a 7. d 17. da 27. . a 8. d 18. © 28. = a 9. a 19. b 29. © a 10. a 20. a ao. 1. @) Costs incurred to date: Materials 2,500,000 Direct labor B Overhead bursabl 7 200, 000 Edennistative costs reimbursable 00,000 P_ 6,000,000 lepreciation during construction . Divided by: Depre Estimated Costs _18,000,000 33 3% Percentage of completion Marketing costs are expensed outright. PAS No. 11 par 8, states that, Contract costs should comprise "costs that are specifically chargeable to the customer under the terms of the contract may include some general administration costs and ified.” development costs for which reimbursement is specified. 2. (a) Contract Price... 12,000,000 Less: Peal pened Cost costs Incurred to Date ...... . P 4,50 Add: Estimated costs to complete ' 5500.00 Total Estimated Costs .... 10,000,000 Estimated Gross Profit .. 2, % of completion (P4,500,000/P 10,000,000) . uae Recognized gross profit in 2008 P__ 900,000 Recognized revenue in 2008 (P12,000,000 x 45%) o.oo cccceecsceeccssee P 5,400,000 Costs recognized in 2008 (P10,000,000 x 45%) P* 4,500,000 230, a Calculate the revenue conta and profit to be recognized: Revenue Grose Profit (ose). a. 6,400,000 ip, 900 ~«=—SC«# 90,0000 b. 5,400,000 isepes (300,000) ©. 6,000,000 4,500,000 1,500,000 d. 6,000,000 5,500,000 900,000 environmentally friendly 8. The company signed an PB tract to build an approximate] access trail to Morayta, Maniha Theoret wras expected tO et srrodect tees xears. The following information wae collected for each Y° . Year 2, and Year 3: Trail feet Additiona e " Addition constructed trail feet 1, Cost Expected Support : Ganended additional timbers laid 24 POT “Curing the fe luring the cost wo during the ee eee, Year completion __year be laid seer tr Year1 100,000 Pasi, 000 150 850 so 5.200 Year 2 150,000 280,000 300 520 a aa 200 Year 3 250,000 ~- 500 -o- ized in Year 3, assume that the company Compute the amount of, tobe recognize letit employs the efforts-expended method of estimating eroontage of sompiesmand fhe company measures its progress by the number of supp ‘aul: . P350,000 : b. Penna a Cannot be determined 4. Using the same information in No. 3, compute the amount of revenue to be recognized in Year 3, assume that the company employs an output measure and _ company measures its progress by the number of trail feet that have been completed: a. P428,864 c. P350,802 : b, 422,640 d. Cannot be determined Dante Construction Company uses the percentage-of-completion method of accounting. During 2008, Dante contracted to build an apartment house for Rizza for P10,000,000. Dante estimated that total costs would amount to P8,000,000 over the period of construction. In connection with this contract, Dante incurred P1,000,000 of construction costs during 2008. Dante billed and collected P1,500,000 from Rizza in 2008. How much gross profit should Dante recognize in 2008? a. — P300,000 ec. P187,500 b. 250,000 d. 125,000 (AICPA) venue Recognition the iti Construction Accountin, fc 3. @) Input Measures: &: Eiforts..Bspencled Method . using timbers laid Year? ._Year3_ Timbers laid Each y; Add: timbers laid my Prior oats 30 Timbers laid to date . ase Add: Additional support t or Total Estimated Timbers ___ 970 Percentage-of-Co i x: CONTRACT PRIS? 800,000 Recognized Revenue toD:; : a ite, Recognized Revenue in Praca a Recognized Revenue in Current Yr, .., 4 © Output Measures — Number Of trail feet Year2 _Year3_ Trail feet Each .. 7,500 8,000 Add: Trail fees in Prior Yours 3,000 _ 10,500 Trail feet to date .... 10,500 18,500 Add: Additional trail feet to be constructed 28200" nO Total Estimated Trail feet ... 18,700 Percentage-of-Completion 10.5/18.7 100% x: CONTRACT PRICE. P.800,000 — P800,000 Recognized Revenue to Date... P 449,198 — P800,000 449,198 Recognized Revenue in Prior Years Recognized Revenue in Current Yr. 350,802 5. @) Contract price ...... P10,000,000 Less: Total Estimated Costs ........ssssssosssssssssessicieiinesssssssssescceg 8,000,000 Estimated gross profit...... .. P- 2,000,000 Multiplied by: percentage of completion (P1,000,000/ P8,000,000) 12.5% Recognized gross profit to date ... P 250,000 0 Less: Recognized gross profit in prior year . Recognized gross profit in current year—2001 ............ P _ 250,000 (b) gevenue: Aecosition Construction Account ae a ee 6. DJ Builders, Inc. hag i sthod of ere, Inc. has consistent! sreentage-of-completion met 9,000,008 Bx cpnstrietionstype contrac cn wo07 Do started work oN 000, “price co ‘ ted in 2008. accounting records steer etian contrat that waa Sm : 17/31/2007 12/31/2008 _ & Cumula Pap00 mulative contract costs incurred P3,900,000 6,300,000 Eotimated total costs at completion 7,800,000 8,100,000 er abe aa ould DJ have recognized on this contract for the year ended 8. P100,000 390.000 ec. 600,000 a 700,000 (aces) 7. DJ Builders Construction Co ain seleng oration contracted to construct a building £400,000. Construction began in 2007 and was completed in 2008 Data relating to the contract are summarized below: Year ended December 31, 2007 2008 Costs incurred . ‘200,000 ‘110,000 Estimated costs to complete 100,000 - DJ Builders uses the percentage-of:completion method as the basis for income recognition. For the years ended December 31, 2007 and 2008, respectively, DJ Builders should report recognized revenue of: 2007 2008 2007 2008 a. P66,667 P 23,333 e P Oe P 90,000 b. - 400,000 d 266,667 «133,888 (AICPA) 8. Bon Construction Company has consistently used the percentage-of-completion method of recognizing income. During 2007, Bon started work on a P3,000,000 construction contract which was completed in 2008. The accounting records provided the following data: 2007 2008 Progress billings ... P1,100,000 —_ P1,900,000 Costs incurred each year 5 900,000 1,800,000 Collections .... 700,000 2,300,000 Estimated cost to complete 1,800,000 248. 6 @ oe 9,000,000 Contract Price... -8:100,000 Less: Total Estimated Costa. P 900,000 Estimated gross profit... — S281 Multiplied by: peroentage of completion P 700,000 Recognized gross profit to date . =. 20.000 Less: Recognized gross Profit in prior year - Recognized gross Profit in each year = 600,000 P_100,000¢a) @ 2007 2008 ae a P 400,000 Contract Price... a one 100%" Multiply by: percentage ofcompletion. as raion Recognized revenue to date .. Ses ose cer Less: Recognized revenue in prior year P 193,983 @ Recognized revenue each year... £183,333 (@) *Percentage of Com, pletion — Cost incurred each year _ boven Add: Cost incurred in prior year Se Cost incurred to date... ; P 310,000 Add: Estimated costs of complete 100,000 = Total estimated costs P_ 310,000 Percentage of completion: Cost incurred to date/ Total estimated costs ...... 66 2/3% 100% 249 Revenue Recognition ~ Construction Accounting Me 2008 _ Conteact Price... 3,000,000, Less: Total Estimated Costs: Costs incurred each year...... Add: Cost incurred each in prior years P1,800,000 P 900,00 eee Cost incurred to date. 2,700,000 Add: Estimated costs to complete = Total estimated costs P2,700,000 Estimated gross profit... P 300,000 Multiplied by: percentage of ___ 100% Recognized gross profit to date P 100,000 P 300,000 Less: Recognized gross profit in prior year = —___ 100,000. Recognized gross profit each year... P_200,000(¢) 9%. @ Contract Price ... 6,000,000 ~ Less: Total Estimated Costs. Costs incurred to 1/10/2007— 12/31/2008 .. P3,600,000 Add: Estimated costs to complete . 1,200,000 4,800,000 ~ Estimated gross profit P1,200,000** Multiplied by: percentage of completion ............. 36/48 . ‘ an Recognized gross profit to date P 900,000 Less: Recognized gross profit in prior year 600,000 « Recognized gross profit in current year — 2008 .. P_ 300,000 (a) omen Chapter § Be ONE ee Sh ee ET ae ‘How much income should Bon have recognized in 2008? . 100,000 160,000 e 110,000 a. 200,000 (AICPA) ercentage-of-completion 9. Ube Construction Company has consistently used the FEE" 49 900 construction method. On January 10, 2007, Ube began work on matruction Was 4,500,000. contract. At the inception date, the estimated cost of ee ‘The following data relate to the progress of the con‘ro°™ — P 600,000 3,600,000 1,200,000 Income recognized at 12/31/2007 Cost incurred 1/10/2007 through 12/31 Estimated cost to complete at 12/31/2008 -. cember 31, 2008? How much income should Ube recognize for the year ended De ee. an0.000 e. 600,000 Pixis $885,000 a. 900,000 ‘aiaeny apartment buildings. Two "rhe status of these buildings 10. Pomelo Builders is in the business of constructing buildings were in progress at the beginning of 2008. atthe beginning of the year were as follows: Costs incurred Estimated costs to to. complete 1/1/2008 Contract Contract price to 1/1/2008 840,000 Apartment —Cubao P1,620,000 P 600,000 , 2,520,000 1,560,000 690,000. Apartment — Marikina During 2008, the following costs were incurred: 600,000 (estimated cost to complete as of 12/31/ 2008, P240,000) Apartment-—Cubao .. Apartment —Marikina......_ P750,000 (job completed) How much is the gross profit in 2008 if Pomelo uses the percentage-of-completion method? a. P 97,800 ‘ c. P262,200 d. 360,000 (PhilCPA) b. 210,000 10. @ Contract price " ‘000 is late ........ P 600, caste neuro tote nF $000 Tg 40.000, "690,000, Batimates iss 1,440,000 P 1,440,000 2,250,000 P2,310,009 Pe ay P 180,000 P 180,000 P 270,000 P 210,009 Estimated gross : \ ‘Multiplied bye cae “@ 412/3%* 83 1/3%* 69 1/3%* 100%* Semaptatinn ~ 2" Se Recognized gross profit to P. 75,000 P 150,000 P 187,200 P 210,009 date... fit Less: Recognized gross Pro — \ 76,000 on 187,200 in prior year ... e Se ea " it Recognized gross profi p°75,000 P 75,000 P_ 187,200 P 22,809 each year . FD ek RO. Therefore, the recognized gross profit in 2008: - P 75,000 Cubao ... *Percentage of completion: . Costs incurred to date/ Total estimated costs - 22,800 P_97,800(a) June 30, 2008 rena June 30, 2007 P22,500,000 P 22,500,000 19,500,000 20,250,000, Estimated gross profit..... P 3,000,000 P 2,250,000 Multiplied by: percentage of completion 9750/19500 15750/20250 Recognized gross profit to date oo... P 1,500,000 P 1,750,000 Less: Recognized gross profit in prior year....... = 1,500,000 Recognized gross profit each year..... P 1,500,000 P 250,000(@) : —— ee eee Recognition — : sognition Construction Accounting a "AL. The following i ee Co. which wen seem ation relates to a flood control project of JSD Construction ted in 2007 and completed in 2008; Costs incurred to-date: Asat June 30, 2007 4s" ‘Asat June 30, 2008 5 Estimated total cost on completion? 12750,000 AsatJune 30,2007 .... 19,500.00 5,750,000 As at June 30, 2008 .... 20,250,000 The project is a P22,500,000 percentage-of-completion m. fixed-price construction contract, and JJD uses the : : ethod ‘ much income would JID report ore ee Seen: On Tune 30, 2008, how Fon ee ¢. 750,000 ‘i 800,000, a. 900,000 (Adapted) x (2 During : e007 Mitch Corporation started a construction job with a total contract ree 0,000. Any costs incurred are expected to be recoverable. The job was completed on December 15, 2008. Additional data are as follows: 2007 2008 Actual costs incurred . 225,000 —-P255,000 Estimated remaining co 225,000 = Billed to customer .. 240,000 360,000 Received from customer 225,000 375,000 Under the cost recovery method of construction accounting (zero-profit approach) what amount should Mitch recognize as gross profit for 2007 and 2008? OT pp = 00. 2 R08 s a. PO P -O- e. P Oe ‘P120,000 b. 75,000 120,000 d. 120,000 120,000 a (Adapted) 13. The following data relate to a construction job started by Jay Company during 2008: Total contract price .... P 100,000 Actual costs during 2008. 20,000 Estimated remaining costs..... 40,000 Billed to customer during 2008 30,000 Received from customer during 2008 ..... 20,000 251 \ Revenute Recognition ~ Construction Accounting 2008 2 © 2007 ——®_ Tee ee 225,000 P375,000* 3s: Coste of long-ter .Coetaot rm construction _256,000 Recognized gross profit in current year .. z a” pee *Contract price .. aoe 00 Less: Recognized revenue in 2007 .... Paced Recognized revenue in 2008 renee ‘construction PAS No. 11 (IAS), tcome of }), Paragraph 31, provides that when the out ey to the contract cannot be estimated reliably, revenue should be recognize extent of the contract costs incurred that it is probable will be recoverable. In ‘of completion, revenue other words, under this alternative method to percentage t n is recognized in an amount equal to the costs incurred for that particular period. jon Accounting This method is known as Cost Recovery Method of Construct: [this is in accordance with PAS No: 11. This is somewhat similar to Hybrid Method (Zero-profit approach) referred to in AICPA Statement of Position 81-1] In the opinion of Skousen, Stice and Stice in their book "Intermediate Accounting, 14th Edition", they state that: "The most significant difference between IAS and U.S. GAAPincludes vast amounts of guidance with respect to revenue recognition in specific industries whereas TAS only provides general principles. This same difference exists in the area of accounting for construction contracts. in fact, in a comparison of U.S. GAAP and IAS commissioned by the FASB, the biggest difference in the area of construction contracts is described as the lack of detailed guidance in IAS for determining the estimated cost to complete a contract; under U.S. GAAP, this guidance is part of AICPA SOP 81-1." @ Recognized Revenue in 2008 P20,000* Less: Cost of long-term construction (cost incurred in 2008) .. 20,000 ery O@) Recognized gross profit in current year—2008 ... *Revenue should be recognized only up to the extent of the contract costs incurred that it is probable will be recoverable. Chapters the cost recovery Any cost incurred are expected to be recoverable. UMSEt gmount should Jay method-construction accounting (zero-profit approach)» company recognize as gross profit for 2008: a =P -~o c. P10,000 b. 4,000 de 12,000 (Adapted) . cost recovery method — 14, The Kirby Construction Company has consitently used "Pet approach) construction accounting method of recognizing income (20F0"P aging for P3,000,000. The Tn 2007, it began a construction project to erect # builGNI TT counting records Project was completed during 2008. Under this meth@™ - vecoverable) disclosed the following: (any costs incured are expected or 2008 P1,900,000 Progress billings during the year Fi LO 1,800,000 Costs incurred during the year 900,000 100,000 Collections on billings during the year 1,800,000 = Estimated costs to complete the project Eke ‘The company should recognized revenue for the year amounting to: 2007 2008 90078: -< ~ "BOOST a P - -. Pxoboog She PN Foon Bis 900.000 2'100,000 a. 1,000,000 2,000,000 (Adapted) 15. The Matibay Construction Corporation uses the percentage-of-completion method of recognizing income from long-term construction contracts. In 2007 Matibay entered into a fixed-price contract to construct a bridge for P30,000,000. Estimated costs to complete the construction and contract costs incurred up to 2009 were as follows: Cumulative Estimated costs cosis incurred to complete As of December 31, 2007 . P 2,000,000 ‘As of December 31, 2008 . 11,000,000 Bevis: ‘Asof December 31, 2009 . 20,000,000 so 4,000,000 Chapter 5 2008 . 2007. ro ized Revenue... 000, _ 1,800,000 \ Less: Cost of long-term construction contract aot P 300,000 \ it ————— 1 Recognized gross profit each year. aaa ct costs incurred 1 the co} i “Revenue should be recognized only up to the extentof the © ad should equalize \ thatitis probable will be recoverable. In other words, Costs with the revenue for that year. **P3,000,000—P900,000 = P2,100,000. 15. @) 2008 2009 541,000,000 P20,000,000 Costs incurred to date .... P711000,000 _ 4,000,000 Add: Estimated costs to complete 52,000,000 24,000,000 Totalestimated cost . 222,00 Percentage of completion: 50% ____831/2% Costs incurred to date /totalestimated costs __°¥" — 83 1/3% Percentage of completion as of 12/31/2009 .. 50% ° Less: Percentage of completion as of 12/31/2 ea o fs Percentage of completion in 2009...... — 16. @) 2008 _ 2009 Contract Price (P3;120,000 x 120%) . ~ P3,744,000 3,744,000 Less: Total Estimated Costs: Costs incurred each year P 998,400 P1,575,600 Add: Costs incurred in prior year .. __ 546,000 _1,544,400. Costs incurred to date .. P1,544,400 P3,120,000 Add: Estimated costs to comple 1,315,600 = Total estimated costs P2,860,000 ~ P3,120,000 Estimated gross profit P 884,000 P 624,000 Multiplied by: ‘Percentage of completion . 54% 100% EO Recognized gross profit to date on P 4773 Less: Recognized gross profit in prior ‘year. "360 P_ 624,000 : ee 477,360 Recognized gross profit each year... P 477,360 p 146,640 (a) Revenue Recognition ~ Construction Accounting Whatis the percentage of completion during the year 2009? a. 25.00% ¢, b. 33.33% d. 16. The October 1, 2007, Oldies Cor i : The O , 2007, ‘P. enters a contract to build a sports arena which itestimated would cost 3,120,000. Oldies bills its clients at cost plus 20% and 50.00% 83,33% recognized construction revenue on a percentage-of-completion basis. Data on this project for 2007, 2008, and 2009 follow: Oldies Corps.’ gross profit on the project for 2009 is: a. P146,640 e b. 477,360 d. Costs Est’d. Costs Incurred To Complete _ 2,054,000 1,315,600 237,160 624,000 (Adapted) 17. The Gamboa Construction Company started work on three job sites during the current year. Any costs incurred are expected to be recoverable. Data relating to the three jobs are given below: Contract Costs Estimated costs Billings Collections. Site price incurred to complete _on contract on contract Batangas ....... P500,000 P375,000 P500,000 — P500,000 Laguna 700,000 100,000 400,000 100,000 100,000 ‘SanFernando 250,000 —_ 100,000 100,000 150,000 100,000 What would be the amount of construction in progress to be reported on the year-end balance sheet if the percentage-of-completion method and cost recovery method — construction accounting (zero-profit approach) is used? ~ (Zero-profit approach) Percentage-of- Cost Recovery Method Completion Method of Construction Accounting a. P765,000 P700,000 b 765,000 765,000 c, 265,000 265,000 da. 265,000 200,000 17. @ Percentage of Completion: Contract Price... Costs incurred each ye: Add: Cost incurred in pric Revenue Recognition = Constrietion Accounting Costs incurred to date ... Add: Estimated costs to complete Totalestimated costs. Estimated gross profit... Multiplied by: percentage of completion ... Recognized gross ese Read Bross profit to date cognized gross profit: 253 Laguna. San Fernando 700,000 P250,000 P100,000 _P100,000 100,000 P100,000 P7400,000 _ 100,000 500,000 P200,000 200,000 P 50,000 20% ___ 50% P 40,000 25,000 P125,000 Batangas Recognized Revenue .. . P500,000* Less: Costs of long-term construction contract 375,000 Recognized gross profit each year P125,000 p40,000 P_25,000 Laguna San Fernando P100,000 — P100,000 100,000 100,000 P 0 iE “0 *Since the contract is completed then the full amount of P500,000 contract price should be recognized as revenue. Refer to No. 12, 13 and 14 for further discussion. Percentage of Completion Construction in Progress Cost Recovery Method note Construction in gress Bats.— CI. 375,000 | 500,000 Bats. Bats.— Cl 375,000 | 500,000 Bats. Pr. 125,000 Pr. 125,000 Lag.- CI 100,000 Lag.— CI 100,000 Pr. 40,000 Sn. F.-CI___ 100,000 Sn.F. CI — 100,000 700,000 | 500,000 Pr. 25,000 12/31/2002 200,000 @ 765,000_| 500,000 12/31/2002 — 265,000 qd) Vv Chapter § Com uring the year, (8, DJ Builders pany began: operations on January 1, OE Oy a ar, Ds Buldee Sopa ane i HE rs eninated thet OC tn ery total cost of P4,800,000. ‘The contract price 000 in construction costs related to the the estimated cost to complete ‘Company was billed for ang lance with the contract agreement. It ig »xpected to be recoverable. (net) — due from customers or E manufacturing facility. At five years to complete the fa: for construction of the facility is P6,800,000- During 2008, DJ Builders incurred P1,250, project. Because of rising material and labor costs, the contract at the end of 2008 is P3,750,000. Joey paid 30% of the contract price in accord: farther agreed, that any costs incurred ise Compute the amount of construction in progress Percentage-of-Completion Method progress billings (net) —due to customers: (Zero-profit approach) Cost Recovery Method of Construction Accounting 290,000 due to 490,000 due from due from a: Soa 290,000 due to 290,000 due from Cdapted) a. b. 0 c. 490,000 due to d. 490,000 due from 19. Daryl Construction Company has consistently used the percentage-of-completion, method of recognizing income. During 2007, Daryl entered into a fixed-price contract to construct an office building for P10,000,000. Information relating to the contract is as follows: 12/31/2007 12/31/2008 Percentage of completion... 20% 60% Estimated total cost at completion P7,500,000 = P8,000,000 Income recognized (cumulative) .... 500,000 1,200,000 Contract costs incurred during 2008 were P3,200,000 c. — P3,500,000 d. 4,800,000 (AICPA) a. b. 3,300,000 (284 18. Rrcentage of Completion: Contract Pri Lees: Total Betimated Gosia: Costs incurred to date . Add: pitied costs to Estimated Multiplied ed Bneltertags 3 gross profit to date ... nized gross profit in prior ye Less: Recognized gross profit in current year Cost Recovery Method of Construction Accounting: Recognized Revenve .... Less: Cost of long-term construction contract Recognized gross profit in current year Refer to No. 12, 13 and 14 for further discussion. Percentage of Completion: Construction in Progress Progress Billings 1,740,000 = 30% x P5,800,000 ca 1,250,000 Profit 200,000 1,450,000 [1,740,000_ P1,740,000 “1,450,000 Progress Billings Less: Construction in progress .. Excess of progress billings over costs and profit (a liability account) due to customers . P_290,000 (©) Cost Recovery Method of Construction Accounting: Progress Billings Construction in Progress cl 1,250,000 1,740,000 . P1,740,000 ate 1,250,000 Progress billings Less: Construction in progress ... Excess of progress billings over costs (a lablty account) due to customers .. P_ 490,000 ©) tion = Construction Accouny iecowntin "go. Lovely Co. recognizes con, percenta hich. completion method, Dyno TUction reve i gun, which continued tanh a Dering 2007, ee a expenses using the Ferean Information on the project follows: (AICPA) itarted workon a P3,000,000 fixed-price construction contract. Any costs incurred are ¢. i i id : ‘xpected to be recoverable. The accounting records disclose the following data for the year ended December 31, 2008: Costs incurred t . . P-930,000 Estimated cost tocomplete 2,170,000 Progress billings 1,100,000 Collections . : How much loss should Rizza have recognized in 2008? (Zero-profit approach) Percentage-of-Completion Oar eee Method of Method Construction Accounting a. P100,000 P -0- b. —0- -0- c. 100,000 100,000 da. 30,000 he (Adapted) In May, 2007, the AJ Company began work ona project that has a contract price of P5,000,000. Any costs incurred are expected to be recoverable. Progress billing, collections are of equal amount with costs incurred. 2007 2008 P1,125,000 —_P3,825,000 Cost incurred to date .... Estimated cost to complete 3,375,000 1,275,000 Total estimated cost ... P4,500,000 — P5,100,000 Revenue Recognition ~ Construction Accounting 19. 20. 255 PAS No. 11 par, 4; A . 41 ic sa ate, . i progress account tad pr roneas tiitects ‘on the presentation of construction I. The gros: 2 eaerone amotut due from customers for contract work as an. asset. The jue from customers for contract work in the net amount of: a. pied > eee red plus recognized profits; less Pe seit of recognized losses and progress billings for all contracts tn, 8s for which costs incurred plus recognized profits (less recognized losses) exceeds progress billings. oe sree amount due to customers for contract work as a liability. The mount due to customers for contract work in the net amourt of: & Gosts incurred plus recognized profits; less : suri of recognized losses and progress billings for all contracts in. Progress for which progress billings exceed costs incurred plus recog Profits (less recognized losses). © Cost incurred to date, 12/31/2007 .. P1,800,000 P7,500,000 x 20% . Less: Cost incurred to date, 12/31/200 4,800,000 P3,300,000 (b) P8,000,000 x 60% .. Cost incurred during 2008 ‘The above computation for cost incurred to date is based on the following formula: Cost Incurred to Date Percentage of Completion ‘Total Estimated Costs Therefore, Cost Incurred to Date = ‘Total Estimated Cost x percentage-of-completion -of-completion method is generally @ Profit to be recognized using the percentage: computed as follows: Recognized gross profit to date = Cost Incurred to Date Estimated gross profit x ‘Total Estimated Cost 21. - Chapters RE petite this computation, 5 Not enough information is given in this problem to perfor action expenses and, 2008 profit must be computed indirectly. Since only Wr cunt), 2007 profit profit are debited to the construction-in-progress cc const. exp.). Cumulative must have been P17,000 (P122,000 CIP less P105,000 E205 Cress P297,000 profit recognized by the end of 2008 must be P67,000 [P3607 2 at was P50,000 cumulative const. exp. (P105,000 + P192,000)). Therefore, (P67,000 - P17,000). cIP ooey Pree Eee 2007 Profit=P17,000 E 2007End.bal 122,000 | 3008 Pe ee 2008 Profit = P50,000 (a) 2008End.bal. 364,000 | © Contract Price .... eee P3,000,000 Less: Total Estimated Costs Cost incurred to date ... . P_ 930,000 Add: Estimated costs to complete 2,170,000 _ 3,100,000 Estimated gross loss .... P_(100,000) @ PAS No. 11, par. 25 provides that when it is probable that contract costs will exceed total contract revenue, the expected loss should be recognized as expense immediately, in full amount, however, this is regardless of the percentage of completion. This is true whether the percentage of completion method or the Cost Recovery Method of Construction Accounting (or zero-profit approach) is used. 23, Revenue Recognition - Construction Accou i 257 IT In am er Se ee aioe 22. (©) 2008 Percentage of Completion Method: aoe f Contract Price - 5,000,000 Less: Total Estimated G: pod yeti 5,100,000 Estimated gross profit (loss) B g0n000 (100000 P 500,000 P( 100,000) Multiply by: Percentage of eompistion eLiasia 600 Recognized gross profit (oss) to date ... Len ect P- 125,000 PC 100,000) . Bross profit in prior year 125,000 Recognized gross profit (oss) each year . P 125,000 P( 225,000) () Gost Recovery Method of Construction 2007 __ 2008 Recognized gross profit (loss) | pepo ; : todate .... P — P( 100,000) Less: Recognized gross (loss) in prior year - = Recognized gross profit (loss) each year . ” Il P( 100,000) ) *No profit i 5 No profit is recognized since the costs incurred should equal to recognized revenue. **Loss P100,000 should be recognized as an anticipated loss in full amount. Incidentally, the partial income statement would be as follows: 2007 2008 P1,125,000* P2,600,000*** 1,125,000 2,700,000 BR 0 PC 100, Recognized Revenue .. Less: Cost of long-term construction contract .. Recognized gross profit (loss) to date ***Recognized revenue is computed by adding the cost incurred in 2008 amounted to P2,700,000 and anticipated loss of P100,000 in 2008. ) Calauag Calauan Contract Price .... P10,500,000 7,500,000 Less: Total Estimated Costs: Costs incurred to date . P 6,000,000 P7,000,000 Add: Estimated costs to complete .. 3,000,000 1,000,000 Total estimated costs ..... P_ 9,000,000 P8,000,000 Estimated gross profit (loss).............. P 1,500,000 —P( 500,000) Multiplied by: Percentage of completion 6/9 100% Recognized gross profit (loss) to date .. P 1,000,000 P( 500,000) Less: Recognized gross profit in prior year Bf eo Recognized gross profit each year P_1,000,000- P(_500,000) Chapter 5 is oe ee ee, 10 Percentage of Completion Method: P10 00) Recognized fit (lose) in 2008: Cae profit (loss) ‘p_500,000 b) jauan Gross profit in 2008 .. Cost Recovery Method of Construction: Pp oO Recognized gross profit (loss) in 2008: * (600,000) Calauag .. p( 600,000)

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