Construction Accounting

TERUEL, MARIA NICOLE

True or False
FALSE 1. Step 2 of the revenue recognition under PFRS 15 is the allocation of the transaction price to the performance
obligation in the contract
TRUE 2. According to PFRS 15, each promise to deliver a distinct good or service in a contract is treated as a separate
performance obligation
FALSE 3. Entity X enters into a contract to build a house for a customer. The contract identifies the customer as the
“owner” and is entitled to any asset created in case the contract is terminated before completion. Entity X’s
performance obligation is most likely to be one that is satisfied at a point in time
TRUE
4. Revenue from a performance obligation that is satisfied over time is recognized as the entity progresses
towards the complete satisfaction of the performance obligation.
FALSE 5. Entity A, a construction firm uses the percentage of completion method to account for its construction
contract. Entity A measures the progress on a contract using the cost-to-cost method. During the year, Entity
A started work on a Php 10M fixed price contract and incurred contract costs of Php 4M. The estimated total
contract costs are Php 8M. Entity A recognizes zero revenue for the year because the contract is not yet
complete
TRUE 6. Using the above facts, Entity A recognizes gross profit of Php 1M for the year.
FALSE 7. The percentage of completion under construction contract is always computed based on the cost incurred to
date as they bear to the expected total cost at completion
TRUE 8. Contract assets and receivables are the same
TRUE 9. A contract liability is recognized if an entity bills a customer before the transfer of a promised good or service
TRUE 10. A contract asset is recognized if an entity’s right to consideration is unconditional

Multiple Choice:

1. Tag Company enters into a construction contract with a customer. PFRS 15 requires the company to do all of the
following at contract exception, except
a. Assess the customer’s ability and intention to pay the contract price on due date
b. Assess whether the promise goods and services in the contract are individually distinct
c. Determine if the performance obligation identified in the contract is satisfied over time or at a point in
time
d. Estimate the total construction cost at completion

2. Which of the following is incorrect regarding Step 2 of the revenue recognition under PFRS 15?
a. An entity shall treat each promise in a contract to transfer a distinct good or service as a separate
performance obligation
b. An entity shall treat a promise to transfer a distinct bundle of goods or services as a separate performance
obligation
c. An entity shall treat a promise to transfer a series of distinct goods or services that are substantially the
same and have the same pattern of transfer to the customer as a separate performance obligation
d. An entity shall treat all promises in a single contract as a single performance obligation regardless of the
nature of those promises, if those promises are negotiated with the customer as a single package

3. W Company enters into a 5-year construction contract with a customer. At inception of the contract, the company
determines its performance obligations in the contract and concludes that it has a single performance obligation.
The company determines that its performance in the contract creates an asset that the customer controls as the
asset is created. The asset created has no alternative use to the company and the company has an enforceable
 right to payment for performance completed to date. The company would most likely recognize revenue from the
contract
a. Over the 5 year period by measuring its progress towards the complete satisfaction of the performance
obligation
b. When the construction is completed and the promised goods and services are transferred to the customer
c. Using the percentage of completion, because this is the method required by PFRS 15 on long term
construction contract
d. Either A or B as a matter of accounting policy choice

4. An entity uses an input method based on cost incurred to measure its progress on a performance obligation that
is satisfied over time. Which of the following items would most likely affect the entity’s computation for the
revenue to be recognized each year

Revenue previously recognized Progress billing to date

a. Yes Yes
b. Yes No
c. No Yes
d. No No

5. An entity performance obligation under a long term construction contract will be satisfied over time. Revenue is
recognized when recorded progress billings
Are Collected Exceed Recorded Cost
a. Yes Yes
b. No Yes
c. No No
d. Yes No

Problem Solving:

1. In 20x1 E Company enters into a contract to construct a building for a customer. The company identifies its
performance obligation to be satisfied over time. The company measures its progress on the contract based on
costs incurred. The contract price is Php 20M. The company has an unconditional right to all billings made in
accordance with the billing schedule stated in the contract. Information on the construction is as follows:
20x1 20x2 20x3
a. Contract cost incurred per year Php 8,160,000 Php 7,320,000 Php 1,920,000
b. Billing per year 10,000,000 7,000,000 3,000,000
c. Collections on billings per year 9,500,000 6,650,000 3,850,000
d. Estimated cost to complete (at year end) 8,840,000 1,720,000

Required: Compute for the following:

a. Gross profit, revenues and costs of construction in 20x1 to 20x3, respectively

20x1 20x2 20x3

Total contract price 20,000,000 20,000,000 20,000,000

(a) Costs incurred to date 8,160,000 15,480,000 17,400,000

Estimated costs complete 8,840,000 1,720,000 -

 (b) Estimated total contract costs 17,000,000 17,200,000 17,400,000

Expected gross profit 3,000,000 2,800,000 2,600,000

Multiply by: % completion (a)/(b) 48% 90% 100%

Gross profit earned to date 1,440,000 2,520,000 2,600,000

Less: Gross profit in prior yrs. - -1,440,000 -2,520,000

Gross profit for the year 1,440,000 1,080,000 80,000

20x1: 8,160,000

20x2: (8,160,000 + 7,320,000 = 15,480,000

20x3: 8,160,000 + 7,320,000 + 1,920,000 = 17,4000,000

Revenues

20x1 20x2 20x3

Total contract rice 20,000,000 20,000,000 20,000,000

Multiply by: % of completion 48% 90% 100%

Revenue to date 9,600,000 18,000,000 20,000,000

Less: Revenue recognized in prior yrs. - -9,600,000 -18,000,000

Revenue for the year 9,600,000 8,400,000 2,000,000

Cost of construction -8,160,000 -7,320,000 -1,920,000

Gross profit for the year 1,440,000 1,080,000 80,000

b. Provide the journal entries under the (1) traditional accounting and (2) PFRS 15

20x1
Traditional accounting PFRS 15
(a) Incurrence of cost:
Construction in progress 8.16M Contract costs 8.16M
Cash 8.16 M Cash 8.16M
(b) Billing:
Accounts receivable 10M Receivable 10M
Progress billings 10M Contract liability 10M
(c) Collection:
Cash 9.5M Cash 9.5M
Accounts receivable 9.5M Receivable 9.5M
(d) Revenue recognition:
Cost of construction 8.16M Contract liability 9.6M
Construction in progress 1.44M Revenue 9.6M
Revenue 9.6M
 Cost of construction 8.16M
Contract costs 8.16M

20x2
Traditional accounting PFRS 15
Construction in progress 7.32M Contract costs 7.32M
Cash 7.32M Cash 7.32M
Accounts receivable 7M Receivable 7M
Progress billings 7M Contract liability 7M
Cash 6.65M Cash 6.65M
Accounts receivable 6.65M Receivable 6.65M
Cost of construction 7.32M Contract liability 8.4M
Construction in progress 1.08M Revenue 8.4M
Revenue 8.4M
Cost of construction 7.32M
Contract costs 7.32M

20x3
Traditional accounting PFRS 15
Construction in progress 1.92M Contract costs 1.92M
Cash 1.92M Cash 1.92M
Accounts receivable 3M Receivable 3M
Progress billings 3M Contract liability 3M
Cash 3.85M Cash 3.85M
Accounts receivable 3.85M Receivable 3.85M
Cost of construction 1.92M Contract liability 2M
Construction progress 80K Revenue 2M
Revenue 2M
Progress billings 20M Cost of construction 1.92M
Construction in progress 20M Contract costs 1.92M

c. Determine the amount presented in the financial statements.

Traditional Accounting PFRS 15

Construction in progress Contract costs
8,160,000 8,160,000
1,440,000 8,160,000
12/31/x1 9,600,000 12/31/x1 -
7,320,000 7,320,000
1,080,000 7,320,000
12/31/x2 18,000,000 12/31/x2 -
1,920,000 1,920,000
80,000 1,920,000
20,000,000 20,000,000 - 12/31/x3
- 12/31/x3
 Progress billings Contract liability
10,000,000 12/31/x1 10,000,000
7,000,000 9,600,000
17,000,000 12/31/x2 400,000 12/31/x1
3,000,000 8,400,000 7,000,000
20,000,000 20,000,000 12/31/x2 1,000,000
12/31/x3 - 2,000,000 3,000,000
12/31/x3 -
Accounts receivable Receivable
10,000,000 10,000,000
9,500,000 9,500,000
12/31/x1 500,000 12/31/x1 500,000
7,000,000 6,650,000 7,000,000 6,650,000
12/31/x2 850,000 12/31/x2 850,000
3,000,000 3,850,000 3,000,000 3,850,000
- 12/31/x3 - 12/31/x3

E Company
Statement of financial position

Traditional Accounting PFRS 15

Current assets: 20x1 20x2 20x3 Current assets: 20x1 20x2 20x3
Accounts receivable 500,000 850,000 - Receivable 500,000 850,000 -
Construction in progress 18,000,000 - Contract asset 1,000,000
Less: Progress billings 17,000,000
Gross amount due from
cost 1,000,000
Total 500,000 1,850,000 - Total 500,000 1,850,000 -

Current liabilities: Current liabilities:

Construction in progress 9,600,000 Contract liability 400,000 -
Less: Progress billings 10,000,000
Gross amount due from
cost 400,000
Total 400,000 - - Total 400,000 - -

E Company
Statement of profit or loss

20x1 20x2 20x3 20x1 20x2 20x3

Revenue 9,600,000 8,400,000 2,000,000 Revenue 9,600,000 8,400,000 2,000,000
- Cost of - - -
Cost of construction -8,160,000 -7,320,000 1,920,000 construction 8,160,000 7,320,000 1,920,000
Gross profit 1,440,000 1,080,000 80,000 Gross profit 1,440,000 1,080,000 80,000
2. Use the information in the preceding problem, except that the company cannot reasonably measure the outcome
of the performance obligation but expects to recover all contract cost incurred (ignore estimated cost to
complete)

Required: Compute for the following:

a. Gross profit, revenues and costs of construction in 20x1, to 20x3, respectively.

20x1 20x2 20x3

Revenue 8,160,000 7,320,000 4,520,000

Contract costs incurred per year -8,160,000 -7,320,000 -1,920,000

Gross profit for the year - - 2,600,000

Revenues in 20x1 and 20x2 are equal to the costs incurred during those years. Revenue in 20x3 is equal to the
contract price less the revenues recognized in 20x1 and 20x2 (20M - 8.16M - 7.32M = 4.52M).

b. Provide the journal entries under (1) traditional accounting and (2) PFRS 15

Traditional accounting PFRS 15

(a) Incurrence of cost:
Construction in progress 8.16M Contract costs 8.16M
Cash 8.16M Cash 8.16M
(b) Billing:
Accounts receivable 10M Receivable 10M
Progress billings 10M Contract liability 10M
(c) Collection:
Cash 9.5M Cash 9.5M
Accounts receivable 9.5M Receivable 9.5M
(d) Revenue recognition:
Cost of construction 8.16M Contract liability 8.16M
Revenue 8.16M Revenue 8.16M
Cost of construction 8.16M
Contract costs 8.16M

20x2
Traditional accounting PFRS 15
Construction in progress 7.32M Contract costs 7.32M
Cash 7.32M Cash 7.32M
Accounts receivable 7M Receivable 7M
Progress billings 7M Contract liability 7M
Cash 6.65M Cash 6.65M
Accounts receivable 6.65M Receivable 6.65M
Cost of construction 7.32M Contract liability 7.32M
Revenue 7.32M Revenue 7.32M
Cost of construction 7.32M
Contract costs 7.32M
 20X3
Traditional accounting PFRS 15
Construction in progress 1.92M Contract costs 1.92M
Cash 1.92M Cash 1.92M
Accounts receivable 3M Receivable 3M
Progress billings 3M Contract liability 3M
Cash 3.85M Cash 3.85M
Accounts receivable 3.85M Receivable 3.85M
Cost of construction 1.92M Contract liability 4.52M
Construction in progress 2.6M Revenue 4.52M
Revenue 4.52M
Cost of construction 1.92M
Contract costs 1.92M

c. Determine the amounts presented in the financial statement.

Traditional Accounting PFRS 15

Construction in progress Contract costs
8,160,000 8,160,000
8,160,000
12/31/x1 8,160,000 12/31/x1 -
7,320,000 7,320,000
7,320,000
12/31/x2 15,480,000 12/31/x2 -
1,920,000 1,920,000
2,600,000 1,920,000
20,000,000 20,000,000 - 12/31/x3
- 12/31/x3

Progress billings Contract liability

10,000,000 12/31/x1 10,000,000
7,000,000 8,160,000
17,000,000 12/31/x2 1,840,000 12/31/x1
3,000,000 7,320,000 7,000,000
20,000,000 20,000,000 1,520,000 12/31/x2
12/31/x3 - 4,520,000 3,000,000
12/31/x3 -
Accounts receivable Receivable
10,000,000 10,000,000
9,500,000 9,500,000
12/31/x1 500,000 12/31/x1 500,000
7,000,000 6,650,000 7,000,000 6,650,000
12/31/x2 850,000 12/31/x2 850,000
3,000,000 3,850,000 3,000,000 3,850,000
- 12/31/x3 - 12/31/x3
 E Company
Statement of financial position

Traditional Accounting PFRS 15

Current assets: 20x1 20x2 20x3 Current asets: 20x1 20x2 20x3
Accounts receivable 500,000 850,000 - Receivable 500,000 850,000 -
Construction in progress Contract asset
Less: Progress billings
Gross amount due from
cost
Total 500,000 850,000 - Total 500,000 850,000 -

Current liabilities: Current liabilities:

Construction in progress 8,160,000 15,480,000 Contract liability 1,840,000 1,520,000
Less: Progress billings 10,000,000 17,000,000
Gross amount due from
cost 1,840,000 1,520,000
Total 1,840,000 1,520,000 - Total 1,840,000 1,520,000 -

E Company
Statement of profit or loss

20x1 20x2 20x3 20x1 20x2 20x3

Revenue 8,160,000 7,320,000 4,520,000 Revenue 8,160,000 7,320,000 4,520,000
- Cost of - - -
Cost of construction -8,160,000 -7,320,000 1,920,000 construction 8,160,000 7,320,000 1,920,000
Gross profit - - 2,600,000 Gross profit - - 2,600,000