BCSVillaluz

INTEGRATED REVIEW IN ADVANCED FINANCIAL ACCOUNTING AND REPORTING

HAND-OUT NO. 4: Construction Contracts

Problem A:
Lakas-Tibay Construction Corp. started a construction on a P40,000,000 road project. The contract period is five years starting January
1, 2022. The accounting records provided the following data:

2022 2023 2024 2025 2026

Actual costs incurred each year 11,250,000 6,300,000 7,950,000 7,225,000 5,275,000
Estimated cost to complete 26,250,000 21,450,000 17,000,000 5,775,000 -
Progress billings 15,000,000 5,000,000 8,000,000 9,000,000 3,000,000

Case 1: The outcome of the project can be estimated reliably. Therefore, the company uses the percentage of completion method of
recognizing profits from construction contracts.

1. How much is the realized gross profit (loss) for the year 2023?
A. 300,000 B. (300,000) C. 450,000 D. (450,000)

2. How much is the construction revenue for the year 2023?

A. 6,000,000 B. 6,300,000 C. 12,000,000 D. 18,000,000

3. What is the percentage completed for 2024?

A. 15% B. 19% C. 60% D. 100%

4. What is the percentage completion of completion as of December 31, 2024?

A. 15% B. 19% C. 60% D. 100%

5. How much is the realized gross profit (loss) for the year 2024?
A. 1,950,000 B. (1,950,000) C. 2,950,000 D. (2,950,000)

6. What is the construction in progress account balance as of December 31, 2024?

A. 22,550,000 B. 23,000,000 C. 23,550,000 D. 24,000,000

7. How much is the realized gross profit (loss) for the year 2025?
A. (225,000) B. (1,225,000) C. 2,775,000 D. 3,775,000

8. How much is the CIP, net of progress billings on December 31, 2025?
A. 500,000 C. 3,000,000
B. (500,000) D. (3,000,000)

9. How much is the realized gross profit (loss) for the year 2026?
A. 500,000 B. (500,000) C. 725,000 D. (725,000)

Case 2: The outcome of the project cannot be estimated reliably. Therefore, the company uses the zero profit method.

1. How much is the construction revenue for the year 2023?

A. 0 B. 6,300,000 C. 17,550,000 D. 40,000,000

2. How much is the realized gross profit (loss) for the year 2024?
A. 0 B. (1,500,000) C. (2,500,000) D. (3,500,000)

3. What is the construction in progress account balance on December 31, 2024?

A. 17,550,000 B. 18,550,000 C. 23,000,000 D. 25,500,000

4. How much is the realized gross profit (loss) for the year 2025?
A. 0 B. 1,500,000 C. 2,500,000 D. (2,500,000)

5. How much is the CIP, net of progress billings on December 31, 2025?
A. 4,275,000 C. 6,775,000
B. (4,275,000) D. (6,775,000)

6. How much is the realized gross profit for the year 2026?
A. 0 B. 500,000 C. 1,500,000 D. 2,000,000

____________________________________________________________________________________________________________
Brian Christian S. Villaluz, CPA
CPA Reviewer in:
Advanced Financial Accounting & Reporting (AFAR)
Financial Accounting & Reporting (FAR) Page 1 of 5
 BCSVillaluz
Problem B:
On April 1, 2021, Tungcab Construction Co. obtained a contract to construct a building. The building was estimated to be built at a total
cost of P17,500,000. The contract is scheduled for completion in October 2023. The contract contains a penalty clause to the effect that
the other party was to deduct P35,000 from the contract price for each week of delay.

On December 31, 2021 and 2022, the company cannot predict the variable consideration regarding the completion of the project on time
because of the different outcomes possible based on the company’s construction schedule and its experiences with past projects.

In 2023, due to bad weather conditions, the company does not expect that it can finish the building on time. The completion of the
project was delayed for 5 weeks. Below are the following data pertaining to the construction activity:

2021 2022 2023

Cost incurred P1,750,000 P6,440,000 P1,085,000
Estimated cost to complete 7,000,000 910,000 -
Progress billings 1,400,000 15,225,000 4,200,000

1. How much is the original contract price?

A. 17,500,000 C. 20,825,000
B. 20,650,000 D. 21,000,000

2. What is the realized gross profit (loss) for 2023?

A. (35,000) C. 822,500
B. (122,500) D. 840,000

-END OF HANDOUT-

____________________________________________________________________________________________________________
Brian Christian S. Villaluz, CPA
CPA Reviewer in:
Advanced Financial Accounting & Reporting (AFAR)
Financial Accounting & Reporting (FAR) Page 2 of 5
 BCSVillaluz

____________________________________________________________________________________________________________
Brian Christian S. Villaluz, CPA
CPA Reviewer in:
Advanced Financial Accounting & Reporting (AFAR)
Financial Accounting & Reporting (FAR) Page 3 of 5
 BCSVillaluz

____________________________________________________________________________________________________________
Brian Christian S. Villaluz, CPA
CPA Reviewer in:
Advanced Financial Accounting & Reporting (AFAR)
Financial Accounting & Reporting (FAR) Page 4 of 5
 BCSVillaluz

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____________________________________________________________________________________________________________
Brian Christian S. Villaluz, CPA
CPA Reviewer in:
Advanced Financial Accounting & Reporting (AFAR)
Financial Accounting & Reporting (FAR) Page 5 of 5