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    (LUZON) Manila 7339344 * Santiago City Colarnba City, Laguna (049) 5453807 * De f oe (VISAYAS) Bacolod City (034) 4346214 * Cebu City (032) 2537900 loc, 218 Excel Professional Services, Inc. Management Firm of Professional Review and Training Center (PRTC) ibela( 0918)2807130 * Angeles City,Pampanga(0917)5103332\ arifias City, Cavite (0917) 8852769 (MINDANAO). Cagayan De Oro City (0995) 0570499 * Davao City (082) 2250049 ADVANCED FINANCIAL ACCOUNTING CPA REVIEW AFAR.2306- LONG-TERM CONSTRUCTION CONTRACTS DE LEON/DE LEON/ DE LEON BATCH OCTOBER2017 LECTURE NOTES 1,0 The main objective addressed by PAS 11 is how to account for revenues and costs in connection with long-term construction contracts. The start of construction activities and their completion very often Crosses several accounting periods, therefore the main Issue is how to allocate revenues and costs ‘appropriately to the affected construction periods. 2.0 Combining and segmenting construction contracts. The provisions of the standard usually are applied to Individual construction contracts. Sometimes, it becomes necessary to account for a group of related contracts as one or two segment in separate parts one. contract so that the substance of the transaction be properly reflected rather than its form. 2.1 When contracts are segmented: When a contract covers the construction of a number of assets, the contract for the construction of each asset shail be considered a separate contract when: 2.1.1 Separate proposals have been made for each asset; 2.1.2 Each asset has been subject to separate egotiation and both contractor and customer were able to accept or reject that part of the contract relating to each asset; and 2.1.3 The costs and revenues of each asset are separately identifiable. 2.2When contracts are combined. A group of contracts, each with @ single or even with different Customers, shall be treated as a single contract because: : 2.2.1 The group of contracts is negotiated as a single package. 2.2.2 The contracts are so closely interrelated that they are effectively part of one project with one overall profit margin; and 2.2.3 The contracts are __ performed concurrently or in a continuous process. either 3.0 Recognition of Contract Revenues and Costs. 3,1 Contract revenues shall comprise the initial price agreed in the contract together with variations, claims, and incentives to the extent that it is probable that they will result in revenue and they ‘are capable of being reliably measured 3.2 Contract costs shall consist of (1) casts that relate directly to the specific contract; (2) costs that are attributable to contract activity in general and can be allocated to contracts; and (3) such ather costs as are specifically chargeable under the terms of the contract, 3.3 Contract revenue and contract costs should be recognized in the income statement when the ‘outcome of the contract can be estimated reliably. 3.4 The revenue and costs should be recognized by reference to the stage of completion at the balance sheet date. 3.5 WHEN IT 15 LIKELY THAT CONTRACT CosTS WiLL EXCEED CONTRACT REVENUE, THEN THE ENTIRE LOSS MUST BE RECOGNIZED IN THE INCOME STATEMENT IMMEDIATELY, REGARDLESS OF THE STAGE OF COMPLETION. Page 1 of 5 4.0 Percentage of 3.6 The percentage of completion of a contract at any balance sheet date is estimated on a cumulative basis. Therefore, changes in estimates are automatically accounted for in the period in which the change occurs and in future periods, which is in accordance with PAS 8, Accounting Policies, ‘Changes in Accounting Estimates and Errors. Completion method, PAS 11 RECOGNIZES ONLY the percentage of completion method of recognition of revenues and costs. The completed contract method whereby no contract revenue or profits are recognized until the contracts ‘are completed or are substantially complete is not permitted under Pas 11 4.1 The stage of completion of a contract can be estimated by a variety of means, depending on the nature of the contract and as to how it can be best measured: 4.1.1 The proportion that costs incurred at the balance sheet date bear to expected total costs required to complete the contract; 4.1.2 Certification of surveys of work performed; or 4.1.3 Completion of physical contract work. proportion of the 4.2 Basic computations for revenues, costs, and profit illustrated. Assume Bilis Construction Company is, constructing a multi-storey building at a fixed price of P15,000,000. Details of costs incurred during the first year of construction activities are: Site labor cost + 1,250,000 Cost of construction materials 3,750,000 Depreciation of equipment used in construction 625,000 Marketing and selling costs on sale of some sections of the building 1,250,000 Total 6,875,000 Additional estimated cost to complete 6,875,000 Calculations for percentage of completion and the amount of revenue, cost, and profit to be recognized. under PAS 11 are: a. Contract costs incurred to dete 5,625,000 i Estimated additional cost to complete 6,875,000 ‘c._% of Completion: (5,825,000/12,500,000) 45% d. Revenue, Cost, and Profit to be recognized In first veer: Revenue: P25,000,000 x 45% 6,750,000 Cost. :P12,500,000 x 45% 5/625,000 Profit :P 2,500,000 x 45% 4,125,000 5.0 Disclosures, 5.1 An entity shall disclose 5.1.1 The amount of contract revenue recognized as revenue in the period 5.1.2 The methods used to determine the contract revenue recognized in the period, 5.1.3 The methods used to determine the stage of completion of contracts in progress at the balance sheet date AFAR.2306 EXCEL PROFESSIONAL SERVICES, INC. 5.1.4 For contracts in progress at the balance sheet date: (a) The aggregate amount of cost incurred and recognized profits, less recognized losses, to date (b) Advances received (c) Retentions 5.1.5 The gross amount due from customers for contract work as an asset 5.1.6 The gross amount due to customers for contract work as a liability 5,2 The gross amount due from customers for contract work is the net amount of costs incurred pius 1. Lazy Bullders Inc. has incurred the following contract costs in the first year on a two-year fixed price contract for 4.0 milion to construct a bridge © Material cost. P2 million = Other contract costs (including + site labor costs) 2 million = Cost to complete 2 milion How much profit or loss should Lazy inc, recognize in the first year of the three-year construction contract? ‘8, Loss of PO.5 million prorated over two years b. Loss of P1.0 million (expensed immediately) c. No profit or loss in the year and deferring it to second year d. Since 60% is the percentage of completion, recognize 60% of loss (i.e., P.6 million) 2. Brillant Inc. is constructing a skyscraper in the heart of town and has signed a fixed price two-year contract for P21,0 million with the local authorities. It has incurred the following cost relating to the contract by the end of first year: + Material cost PS mittion Labor cost P2 million + Construction overhead 2 million + Marketing costs PO.S million + Depreciation of the Idle ptant and equipment PO.5 million ‘At the end of the first year, it has estimated cost to complete the contract = P9 million What profit or loss from the contract should Brilliant lng, recognize at the end of the first year? a, P45 million (9/18 x 3.0) b, P4.0 million (9/18 x 2.0) ¢.PL.05 milion (10/19 x 2.0) 4, P1.28 million (9.5/18.5 x 2.5) 3. Mediocre Inc. has entered into a very profitable fixed price contract for contracting a high-rise building over @ period of three years. It incurs the following costs relating to the contract during the first year: recognized profits, less the sum of recognized losses and progress billings for contract in progress for which cost incurred plus recognized profits, less recognized losses exceeds progress billings. 5.3 The gross amount due to customers for contract work is the net amount of cost. incurred plus recognized profits, less the sum of recognized losses and progress billings for contracts in progress for which progress billings exceed cost incurred plus recognized profits, less recognized losses. MULTIPLE CHOICE THEORETICAL for the construction PO.5 million ‘+ Marketing costs for selling apartments when they are ready P1.0 million ‘Total estimated cost of the project = PLE million ‘The percentage of completion of this contract at the year-end is a, 33 1/3% (=6.0/18.0) ¢. 25% (= 4.5/18.0) b. 27% (= 4.5/16.5) d, 39% (=7.0/18) A construetion company is in the middle of a two-year construction of a two-year construction contract when it receives a letter from the customer extending the contract by @ year and requiring the construction company to increase its output in proportion of the ‘number of years of the new contract to the previous contract period.: This is allowed in recognizing additional revenue according to PAS 11 if a. flegotiations have reached an advanced stage and it is probable that the customer will accept the claim b. The contract is suffigiently advanced and it is probable that the specified performance standards will be exceeded or met ¢. It is probable that the customer will approve the variation and the amount of revenue arising from the variation, and the amount of revenue can bé reliably measured d. It Is probable that the customer will approve the variation and the amount of revenue arising from the variation, whether the amount of revenue can be reliably measured or not A construction company signed a contract to build a theater over a period of two years, and with this contract also signed a maintenance contract for five years. Both the contracts are negotiable as a single package and are closely interrelated 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 the completed ‘contracted eee a ee alr Recogn ae eerie 4 1 GRE bOE satan em” ay HER it ah at le tata Unde Saree EERE uenputsed By the the completed contract method and maintenance conve ae i OEE Late of corre i . method Page 2 of 5 www.prte.com.ph AFAR.2306 EXCEL PROFESSIONAL SERVICES, INC Problem 1 The OBAMA: CONSTRUCTION COMPANY has a 3-year contract to construct @ bridge. The contract price is 5,600,000. The following data pertain to the construction period, 2017 2018 2019 Cost to date P4,512,000 4,032,000 4,536,000 Estimated cost to complete 3,528,000 448,000 - Progress billings each year 2,240,000 2,240,000 1,220,000 Collections of billings each year 1,960,000 2,240,000 1,400,000 Required: 1, Prepare journal entries each year. Show supporting computations for year-end entries. 2. Calculate balance of construction-in-progress account at the end of each year before closing, 3, Calculate revenue recognized thru end of each year and compare with the CIP balances calculated in Item 2 above, Problem 2 On January 1, 2017, JASON CONSTRUCTION CORPORATION entered into a 3-year contract to build @ dam. The required contract price is P5,529,600 and the estimated cost is P4,915,200. The following cost data relate to the construction activities, 2017 2018 2019 Costs incurred each year P1,843,200 P1,603,584 2,374,656, Estimated cost to complete 3,072,000 2,297,856 0 Billings to customer each year 1,935,360 1,751,040 1,843,200 Cash collected «1,843,200 1,658,880 2,027,520 Diversified uses cost-to-cost percentage of completion method. Required. 1. Prepare adjusting. journal information at each year-end 2. Prepare supporting computations for each entry. entries for the above Problem 3 Trump Construction Company began operations in 2017. Construction activity for the first year is shown below. All contracts are with different customers, and any work remaining at. December 31, 2017, is expected to be completed in 2018. cash _Cost__—_—Estimated Total Billings Collections Incurred Additional Contract Through Through Through costs to prop Price 2/BI/I7_— «12/31/17 12/31/17 complete, 1 P-560,000. P360,000 P340,000 450,000 P150,000 2 670,000 220,000 210,000 126,000 504,000 3 520,000 500,000 440,000 330,000 1,750,000 P2,080,000 990,000 P806,000 P654,000, Required: Prepare 2 partial Income statement and balance sheet to indicate how the above information would be Page 3 of 5 www. prte.com.ph reported for financial accounting purposes. Trump Construction Company uses the cost-to-cost percentage of completion method. Problem 4 In 2017, DIANCIN CORPORATION began construction work under @ 3-year contract. The contract price was 2,400,000. DIANCIN uses the percentage of completion method for financial accounting purposes. The income to bbe recognized each year is based on the proportion of cost incurred to total estimated costs for completing the Contract, The financial statement presentations relating to this contract at December 31, 2017, follows Balance Sheet Accounts receivable - Construction Contracts, Construction in progress Less contract billings Cost of uncompleted contract in excess of billings 51,600 156,000 147,600 8,400 Income Statement Gross profit on the contract recognized in 2017, P46,800 How much cash was collected in 2017 on this contract? What was the initial estimated total income before tax ‘on this contract in 2017? How much was the actual cost incurred in 2017? How much was the total cost of the project estimated at the end of 20177 5. Prepare all the necessary journal entries for 2017. Problem 5. EXCEL CONSTRUCTION COMPANY is part way through a contract to build an Irrigation dam at a contracted price of P192 milion Details of the progress of this contract at December 31, 2016 are shown below Peso million Cumulative sales revenues billed 96 Cumulative cost of sales to date 72 Profit to date 24 ‘The following information has been extracted from the accounting records at December 31, 2017 Peso Million ‘Total progress billings for work certified at November 30, 2017 128 Total costs incurred to date 124.8 EXCEU's surveyor has estimated the sales vaive of the further work completed during December, 2017 were P12.8 million. At December 31, 2017 the estimated remaining costs to complete the contract were P28.8 milion. EXCEL calculates the percentage of completion of its contracts as the proportion of sales value earned to date compared with the contract price. Al! estimates can be taken as being reliable. Required: Calculate a. The gross profit or loss to be reported on the above contract for the 2017 Income statement, and b. The amount due To/From customers in the balance sheet at Oecember 31, 2017. AFAR.2306 EXCEL PROFESSIONAL SERVICES, INC MULTIPLE CHOICE STRONG CONSTRUCTIONS uses the percentage of completion method in recognizing income. In 2014, STRONG was engaged by SM on a fixed-price-contract to build a 3-storey shopping mail on January 1, 2017, 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 72s 2016 Architect's estimated total cost of completion 7,500,000 P8,000,000 Costs incurred 3,000,000 Percentage of completion 60% Income recognized to date 500,000 1,200,000 ‘Compute for the percentage completed in 2014 on the SM shopping mall. 2. 40% 209% b. 25% 6. 30% On January 2, 2017, QUICKBUILD ERECTORS entered into contract to construct two projects. The following data relate to the construction activities. BroiectA Project B ‘Contract price 945,000 P75,000 Gost Incurred during 2016 540,000 630,000 Estimated costs to complete «270,000» 157,500 Billings to customer 337/500 607,500 2. What amount of gross profit should QUICKSUILD ERECTORS report in ifs 2017 income statement under the following methods? Percentane of Zeto Profit Completion Method Method a P 0 (90,000) b P (112,500) (22,500) S P ( 22,500) ° 0 d P ( 22,500) (112,500) 3, BEST - EVER CONSTRUCTION, INC . recognizes construction revenue and costs using the percentage af Completion method, During 2016, a single long-term project was begun which continued through 2017, Information on the project follows: 2016 2012 Accounts receivable 350,000 1,050,000 Incurred costs during year 367,500 672,000, Construction in progress 427,000 1,274,000 Billings on contract 350/000 4,470,000 ‘The construction accounts are at amounts to-date what is the gross profit recognized from this long-term contract? 2016 oie 3. P 77,000 P 798,000 b,77,000 350,000 c 59,500 448,000 d. 59,500 175,000, CIGNAL ERECTORS began operations on January 2, 2017. uring 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 962,500 in construction costs related to the construction project. The estimated cost to complete the contract. is P3,412)500, TEAM was billed and pald 30% of the contract price subject to a 10% retention. 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, P273,437 (current liability) b. 273,437 (current asset) 437,500 (current asset) d.P437,500 (current lability) DESTINY CONSTRUCTIONS, INC, started work on three job sites during 2017. The following data pertain to the three Jobs at the end of 2047. Site Contract. Costs Incurred Est. cost Billings on Collection Price to Comtract_on Contract Complete Mio, 525,000 393,750 - P525,000 P'525,000 Cebu 735,000 444,480, P296,320 400,000 400,000 Dv. 262500 105.900 105.000 157.500 _ 105,000 Totals 4.522500 943,230 401.320 4.082.500 4.030.000 5. On the balance sheet ag of the end of 2017, the amount ‘of Construction in Progress net of Progress Billings OR the amount of Progress, Billings net of Construction in Progress ta be reported using: _% of Completion, Zero Profit Method a, Pid,430 current asset 13,820 current lability, BL p 12/430 current liability P13,820 current asset © P 12/430(current liability 23,820 current liability d. P 12/430 current asset P13,820 current asset 6 On the income statement for the year ended December 31, 2017, the realized gross prof or (loss) using ‘6-of Completion a. P154,020 P131,250 b P451,700 125,450 c P157,500 (131,250) d. (251,700) (125,450) ‘The SKYVIEW CORPORATION started work on three contracts during 2027, Data relating to the three jobs are: Contract - Costs. Est cost Billings Collections Price Incurred to on on complete contract contract ‘Goneract 1 P400,000. P300,000 = p400,000 P320,000 Contract 2 560,000 60,000 320,000 80,000» 40,000 Contract 3 200,000 80,000 80,000 - : 7. Calculate the amount of Construction in Progress to be reported in the year-end balance sheet under percentage ‘of completion. 3, 132,000 . P460,000 b, 212,000 d. 628,000 RAINBOW, INC., @ construction company, has 2 P8,000,000 Contract that was started in 2015, The following Information Is provided for the construction activities. Construction’ ‘Actual cost. Est cost to complete Years Incurred to-date ‘at year-end 2017 1,024,000 4,086,000, 2018 3,993,600 2,246,400 2019 6,473,600 ° Calculate the amount of gross profit to be reported for 2018 under percentage of completion method: fo complete the facility at a cost of P3,/937,500. The total Rites rset. Deane Contract price for the construction of the facility is patascy " 5/468,750. During the year, the company incurred Cae ae. SEARD DGS, © - end of AFAR.2306 - © www. prte.com.p! —. AFAR.2306 Page 4 ofS EXCEL PROFESSIONAL SERVICES, INC. ——EEE——————_————————— CLASSROOM DRILL EEE CONSTRUCTION CORPORATION uses the percentage of completion method of accounting. The company started work on two job sites during 2016. Data relating to the ‘wo jobs are given below: Contract Actual cost Est. cost to Price Dec 31.2016 complete: Contract 1 600,000 P150,000 150,000, Contract 2. 450,000 87,500 162,500 In 2017, Contract 3 was started for a contract price of 900,000, As of December 31, 2017, the following data are given. Actual_cost1/1/16 to 1/17 Est. cost to ‘complete Contract 1 280,000, 70,000 Contract 2 180.000 120,000 Contract 3 180,000 320,000 1. What are the percentages of completion for the three contracts as of December 31, 2017? Contract, Contract2 Contract 3 a 50% 35% 36% bd 65% 442% 36% © 65% 60% 50% 4, 80% 60% 36% 2. Using the percentage of completion method of recognizing income, how much income should be reported for the year 20177 a. P 90,000 b. P 144,000 c. P 214,000 d. P 434,000 As of December 31, 2017, FFF BUILDERS, INC. has a 5,000,000 contract’ in progress on which the following Information Is given. Cost Incurred to Est. cost to complete date at year-end 2015 640,000 2,560,000 2016 2,496,000 4,404,000 2017 4,046,000 0 3. How much should be the reported income for 2015 under the percentage of completion method of recognizing income? a. P 1,800,000 b. P 1,000,000 sc. P 360,000 ae 0 How much should be the reported income for 2016 under the percentage of completion method of recognizing income? a, P 704,000 © P360,000 b, P 344,000 d. P 300,000 ‘The B88 CONSTRUCTIONS, INC, uses the percentage of completion method of recognizing income from long-term construction contracts, In 2015, BBB entered into a fixed- price contract to construct a bridge for 30,000,009 6. How much income should 888 CONSTRUCTIONS recognize on the above contract for the year ended December 31, 20167 ‘a. P 1,000,000 b. P 1,666,667 ¢. P.2,700,000 d. P 2,666,667 CCC CONSTRUCTIONS, INC.. started work on three job sites during the current year. Data relating to the three jobs are given below: Est, cost Collectio Contract Costs to Billings ps on. Site Brice’ Incurred complete on. contract contract > ABRA $00,000 375,000 = P§00,000 400,000 Bohol 700,000 100,000 400,000 100,000 $0,000 CEBU 250,000 100,000 100,000 - . 7. What amount of income should be reported for the current year if the zero profit method is used for all contracts? a, P 100,000 . P 240,000 b. 125,000 4. P 375,000 8. What amount of income should be reported for the current year if the percentage of completion method is, used for all contracts? a, P 65,000 b. 190,000 . P 215,000 4, P 240,000 9. What would be the amount of construction in progress to be reported on the year-end balance sheet if the percentage of completion method is used? a P165,000 ¢. 575,000 b. P 265,000 4d. P 785,000 The following data related to a construction job started by DDD ERECTORS during the year 2017 Total contract price 100,000 ‘Actual costs during the year 2017 20,000 Estimated remaining costs 40,000 Billed to customer during the year 2017 30,000 Recelved from customer during the year 10,000 » 2007 : 10. Under the percentage of completion method, how much should DDD ERECTORS recognize as gross profit for the year 2017? a. PO b. P 13,333 c. P 26,667 d. P 33,333 AAA CONTRACTORS recognizes construction revenues and expenses using the percentage of completion method During 2016, @ single long-term contract was started, whlch continued through the year 2017. Information the project follows: 2018 2017 fon 100,000 300,000 Estimated cost to complete the construction and contract Accounts receivable costs incurred up to 2017 were as follows contract Cumulative Construction expense each 105,000 | 192,000 contract Costs Estimated costs year curred to.complets iP, to-date 122,000 364,000 As of Dec. 31, 2015 P 2,000,000 PF 16,000,000 Partial bilings, to-date 100,000 420,000 ‘As of Dec. 31,2016 11,000,000 11,000,000 11, Profit recognized in 2016 should be ‘As of Dec. 31, 2017 20,000,000 5,000,000 a. P 50,000 .P_17,000 5 What ie he estimated percentage of completion’as of b, P 108,000 & P 122,000 December 31, 20177 a, 25.00% ©. 50% 12, Profit cecognized in 2017 should be >. 33.33% 4, 80% a. P 50,000

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