Accounting Lessons with BCSV

Revenue from Construction Contracts

Problem 1: (Percentage of Completion vs. Zero profit method)

Tigreal Construction Corp. started a construction on a P40,000,000 road project. The contract period is five years starting
January 1, 2016. The accounting records provided the following data:

2016 2017 2018 2019 2020

Actual costs incurred
each year P11,250,000 P6,300,000 P7,950,000 P7,225,000 P5,275,000
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
Cash collections 13,500,000 7,000,000 7,200,000 8,100,000 4,200,000

Case 1: The outcome of the project can be estimated reliably. Compute for the following:
1. Realized gross profit (loss) for the years 2016 through 2020.
2. Percentage of completion as of December 31, 2016 through 2020.
3. Percentage completed for the years 2016 through 2020.
4. Construction revenue for the years 2016 through 2020.
5. What is the construction in progress account balance as of December 31, 2018?
6. How much is the contract asset or contract liability as of December 31, 2019?

Case 2: The outcome of the project cannot be estimated reliably.

1. Realized gross profit (loss) for the years 2016 through 2020.
2. Construction revenue for the years 2016 through 2020.
3. What is the construction in progress account balance as of December 31, 2018?
4. How much is the contract asset or contract liability as of December 31, 2019?

Problem 2: (Construction Contract with Variation; Variable Consideration)

On January 1, 2019, FONOLLOSA Company entered into a contract with a customer to construct a new building. FONOLLOSA
determines that control of the building is passed to the customer as it is constructed. Furthermore, the target date of
completion is December 31, 2021. The contract price agreed upon by the parties is P20 million subject to the additional
contractual provisions:
➢ Incentive of P30,000 will be provided to FONOLLOSA per week if FONOLLOSA completes the construction earlier
than the target date.
➢ Penalty of P40,000 per week will be charged to FONOLLOSA if FONOLLOSA does not complete the construction
within the target date.
➢ If the building is issued a green certification, FONOLLOSA will be entitled to additional consideration of P200,000.

On December 31, 2019, FONOLLOSA determined that the best estimate of the variable consideration is using the "expected
value method" for the timing of completion of the project. Based on the information available to FONOLLOSA as of this
date, the following estimates were obtained:
➢ 60% probability to complete the project six weeks ahead of target date of completion.
➢ 20% probability to complete the project on time with no incentive or penalty.
➢ 20% probability to complete the project five weeks past target date of completion.

As for the green certification, FONOLLOSA believes that it is highly probable that such certification will be obtained for the
project.

As of December 31, 2020, the estimates related to the completion of the project were revised to:
➢ 70% probability to complete the project six weeks ahead of target date of completion.
➢ 20% probability to complete the project on time with no incentive or penalty.
➢ 10% probability to complete the project two weeks past target date of completion.

As for the green certification, FONOLLOSA believes that it is highly probable that such certification will be obtained for the
project.

The following summarizes construction costs for 2019 and 2020:

2019 2020
Construction cost for the year P9,000,000 P2,250,000
Estimated cost to complete as of year-end 7,000,000 3,750,000

1. Assuming that the outcome of the project can be estimated reliably, how much is the realized gross
profit (loss) for the year ended 2020 under PFRS 15?

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 2. Assuming that the outcome of the project can be estimated reliably, how much is the construction
revenue for the year 2020 under PFRS 15?

Problem 3:
In 2020, BRADFORD Corp. was contracted to build a bridge for P150 million. The project to be completed in two years and
the contract provided for:
- 10% mobilization fee (to be deduct from the last billing) payable within 15 days after the assigning of the contract.
- 10% retention provision on all billings
- And payment of progress billing within 10 days from acceptance.

BRADFORD uses a percentage of completion. The percentage of completion of accounting, estimated a 25% gross margin
on the project. By the end of 2020, BRADFORD had presented progress billings corresponding to 50% completion. All of
the progress billing presented in 2020 were accepted, except the last one 10% which was accepted on January 5, 2021.
With the exception of one bill for 8% which was due on January 7, 2021. All of the billings accepted in 2020 were settled.
Collections made in 2020 amounted to…

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