PROBLEM VI

RONIEL M. AUSTRIA
BSA 3A
Methods of Constructing Accounting
Beavis Construction Company was the low bidder on a construction
project to build an earthen dam for P1,800,000. The project was begun in
20x4 and completed in 20x5. Cost and other data are presented below:

20x4 20x5

Cost incurred during the year……………... P 450,000 P 1,100,000

Estimated costs to complete……………….. 1,200,000 0

Billings during the year………………………. 400,000 1,400,000

Cash collections during the year…………. 300,000 1,500,000

Required: Compute the amount of gross
profit recognized during 20x4 and 20x5.

1. Assume that Beavis uses the overtime (percentage

of completion) method for revenue recognition.

2. Assume that Beavis uses the point-in-time (cost

recovery) method for revenue recognition.
1. Percentage of Completion Method
• To determine the percentage of completion:
20x4 20x5
Contract price:
Initial amount of contract P 1,800,000 P 1,800,000
Variation - -
Total contract price P 1,800,000 P 1,800,000
Cost incurred in each year P 450,000 P 1,100,000
Add: Cost incurred in prior years - 450,000
Actual costs incurred to date(1) P 450,000 P 1,550,000
Add: Estimated costs to complete 1,200,000 0
Total estimated costs(2) P 1,650,000 P 1,550,000
Estimated gross profit P 150,000 P250,000
Percentage of completion(1)/(2) 27.27% 100%
• The revenue, expenses(costs) and profit will be recognized in
profit or loss as follows:
20x4 To date Reccognized in prior Recognized in current
years year
Revenue
(1,800,000 x 27.27%) P 490,860 - P 490,860
Costs/Expenses
(1,650,000 x 27.27%) (449,955) - (449,955)
Gross Profit
(150,000 x 27.27%) P 40,905 P 40,905

20x5 To date Reccognized in prior Recognized in current

years year
Revenue
(1,800,000 x 100%) P 1,800,000 P 490,860 P 1,309,140
Costs/Expenses
(1,550,000 x 100%) (1,550,000) (449,955) (1,100,045)
Gross Profit
(250,000 x 100%) P 250,000 P 40,905 P 209,095
• Alternatively, the gross profit recognized each year may also
computed as follows:
20x4 20x5
Contract price:
Initial amount of contract P 1,800,000 P 1,800,000
Variation - -
Total contract price P 1,800,000 P 1,800,000
Cost incurred in each year P 450,000 P 1,100,000
Add: Cost incurred in prior years - 450,000
Actual costs incurred to date(1) P 450,000 P 1,550,000
Add:Estimated costs to complete 1,200,000 0
Total estimated costs(2) P 1,650,000 P 1,550,000
Estimated gross profit P150,000 P250,000
Percentage of completion(1)/(2) 27.27% 100%
Gross profit to date P 40,905 P 250,000
Less: Gross profit in prior years - 40,905
Gross profit in current year P 40,905 P 209 095
• Following are the entries for the years 20x4 to 20x5”
20x4 20x5
1. To record costs incurred:
Construction in Progress 450,000 1,100,000
Materials Inventory - -
Cash, payables, etc. 450,000 1,100,000

2. To record progress billings:

Accounts receivable 400,000 1,400,000
Progress billings 400,000 1,400,000

3. To record collections:
Cash 300,000 1,500,000
Accounts receivable 300,000 1,500,000
4. To recognize Revenue, Costs
and Gross Profit:
Construction Expenses 450,000 1,100,000
Construction in Progress 40,860 209,140
Revenue from Construction 490,860 1,309,140

5. To close Construction in
Progress and Progress Billings
account:
Progress billings 1,800,000
Construction in Progress 1,800,000
2. Costs Recovery Method
• The following table shows the data needed for further analysis:
20x4 20x5
Contract price:
Initial amount of contract P 1,800,000 P 1,800,000
Variation - -
Total contract price P 1,800,000 P 1,800,000
Cost incurred in each year P 450,000 P 1,100,000
Add: Cost incurred in prior years - 450,000
Actual costs incurred to date P 450,000 P 1,550,000
Add: Estimated costs Ƨ -
Total estimated costs PƧ P 1,550,000
• The revenue, expenses(costs) and profit will be recognized in
profit or loss as follows:
20x4 To date Reccognized in prior Recognized in current
years year
Revenue P 450,000 P 450,000
-
Costs/Expenses (450,000) (450,000)
-
Gross Profit P0 P0

20x5 To date Reccognized in prior Recognized in current

years year
Revenue
(1,800,000 x 100%) P 1,800,000 P 450,000 P 1,350,000
Costs/Expenses
(1,550,000 x 100%) (1,550,000) (450,000) (1,100,000)
Gross Profit
(250,000 x 100%) P 250,000 P0 P 250,000
• Alternatively, the gross profit recognized each year may also
computed as follows:
20x4 20x5
Contract price:
Initial amount of contract P 1,800,000 P 1,800,000
Variation - -
Total contract price P 1,800,000 P 1,800,000
Cost incurred in each year P 450,000 P 1,100,000
Add: Cost incurred in prior years - 450,000
Actual costs incurred to date(1) P 450,000 P 1,550,000
Add:Estimated costs to complete Ƨ 0
Total estimated costs(2) PƧ P 1,550,000
Estimated gross profit P0 P250,000
Percentage of completion(1)/(2) - 100%
Gross profit to date P0 P 250,000
Less: Gross profit in prior years - 0
Gross profit in current year P0 P 250,000
• Following are the entries for the years 20x4 to 20x5”
20x4 20x5
1. To record costs incurred:
Construction in Progress 450,000 1,100,000
Materials Inventory - -
Cash, payables, etc. 450,000 1,100,000

2. To record progress billings:

Accounts receivable 400,000 1,400,000
Progress billings 400,000 1,400,000

3. To record collections:
Cash 300,000 1,500,000
Accounts receivable 300,000 1,500,000
4. To recognize Revenue, Costs
and Gross Profit:
Construction Expenses 450,000 1,100,000
Construction in Progress - 250,000
Revenue from Construction 450,000 1,350,000

5. To close Construction in
Progress and Progress Billings
account:
Progress billings 1,800,000
Construction in Progress 1,800,000
THANK YOU!!☺