Sol Man Chapter 7 Construction Contracts 2020 Edition

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sol-man-chapter-7-construction-contracts-2020-edition
BS Accountancy (De La Salle-College of Saint Benilde)
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Chapter 7
Construction Contracts
PROBLEM 1: TRUE OR FALSE
1. FALSE – Step 2 is the identification of the performance
obligations in the contract
2. TRUE
3. FALSE – over time
4. TRUE
5. FALSE
6. TRUE
➢ 4M costs incurred ÷ 8M estimated total contract costs = 50%
➢ 10M contract price – 8M estimated total contract costs = 2M
expected total gross profit x 50% completion = 1M gross profit
7. FALSE
8. FALSE
9. TRUE
10. FALSE
PROBLEM 2: MULTIPLE CHOICE – THEORY

1. D – choice (d) is incorrect. Total contract costs may need to be
estimated only if the entity chooses to use the ‘cost-to-cost’
method to measure its progress on a contract. This may not be
necessary if the entity uses other methods, for example, an
output method.
2. D
3. A
4. B
5. C
6. D
7. B
8. A
9. C
10. C

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PROBLEM 3: EXERCISES
1. Solutions:
Requirement (a):
➢ Gross profits
20x1 20x2 20x3
Total contract price 20,000,000 20,000,000 20,000,000
(a) Costs incurred to date (1) 8,160,000 15,480,000 17,400,000
Estimated costs to 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
(1) 20x1: 8,160,000

20x2: (8,160,000 + 7,320,000) = 15,480,000
20x3: (8,160,000 + 7,320,000 + 1,920,000) = 17,400,000
➢ Revenues
20x1 20x2 20x3
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
Requirement (b): Journal entries
➢ 20x1
Traditional accounting PFRS 15
(a) Incurrence of cost:
Construction in progress 8.16M Contract costs 8.16M
Cash (or other accounts) 8.16M Cash (or other accounts) 8.16M

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(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
Cash 6.65M Cash 6.65M
Revenue 8.4M
➢ 20x3
Cost of construction 1.92M Contract liability 2M
Construction in progress 80K Revenue 2M
Revenue 2M
Progress billing 20M Cost of construction 1.92M
Construction in progress 20M Contract costs 1.92M
to eliminate the accounts

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Requirement (c): Financial statements
 The debit balance in the contract liability account on 12/31/x2 is presented as asset.

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2. Solutions:
Requirement (a):
20x1 20x2 20x3
Revenue (a) 8,160,000 7,320,000 4,520,000
Contract costs incurred per yr. (8,160,000) (7,320,000) (1,920,000)
Gross profit for the year - - 2,600,000
(a)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).

➢ 20x1
(b) Billing:

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(c) Collection:
Cash 9.5M Cash 9.5M
Revenue 8.16M Revenue 8.16M
➢ 20x2
➢ 20x3
Revenue 4.52M

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PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL
1. B 20M x 2/16 = 2,500,000
2. A
Solution:
20x1 20x2
Total contract price 3,000,000 3,000,000
Multiply by: % of completion 20% 60%
Contract revenue to date 600,000 1,800,000
Contract revenue in prior years - (600,000)
Contract revenue for the year 600,000 1,200,000
Cost of construction (squeeze) (450,000) (990,000)
Profit (loss) for the year 150,000 210,000(a)
(a) (360,000 -150,000) = 210,000
3. C
Solution:
20x1 20x2
(a) Costs incurred to date 3,900,000 6,300,000
Estimated costs to complete (not needed) (not needed)
(b) Estimated total contract costs (given) 7,800,000 8,100,000
Expected profit (loss) 1,200,000 900,000
Multiply by: % of completion (a) ÷ (b) 50% 77.7778%
Profit (loss) to date 600,000 700,000
Profit recognized in prior years - (600,000)
Profit (loss) for the year 600,000 100,000
20x1 20x2
Multiply by: % of completion 50% 77.7778%
Contract revenue to date 4,500,000 7,000,000
Contract revenue in prior years - (4,500,000)
Contract revenue for the year 4,500,000 2,500,000
Cost of construction (squeeze) (3,900,000) (2,400,000)

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4. C
Solution:
20x1 20x2
Contract revenue for the year (a) 3,900,000 2,400,000
Cost of construction (3,900,000) (2,400,000)
Profit (loss) for the year - -
Equal to the costs incurred per year. The costs incurred in 20x2 are
(a)
computed as follows: (6,300,000 - 3,900,000 = 2,400,000).
5. A – No revenue, cost of construction and gross profit are

recognized during the course of construction. These are
recognized only when the construction is completed and legal
title over the constructed building is transferred to the
customer.
6. D
Solution:
20x1 20x2 20x3
Contract price 18,000,000 18,000,000 18,000,000
Estimated total contract costs 12,000,000 12,300,000 12,280,000
Expected total gross profit 6,000,000 5,700,000 5,720,000
Percentage of completion (a) 25% 68% 100%
Gross profit to date 1,500,000 3,876,000 5,720,000
Gross profit in prior years (1,500,000) (3,876,000)
Gross profit for the year 1,500,000 2,376,000 1,844,000
(a) Costs incurred to date 3,000,000 8,364,000 12,280,000

Percentage of completion 25% 68% 100%

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7. B
Solution:
➢ Traditional accounting
Construction in progress
Costs incurred to date - 20x2 4,840,000
Gross profit - 20x1 (see below) 570,000
Gross profit - 20x2 (see below) 990,000
12/31/x2 6,400,000
20x1 20x2 20x3

Contract price 8,000,000 8,000,000 8,000,000
Contract costs incurred to date 1,830,000 4,840,000 6,000,000
Expected total gross profit 1,900,000 1,950,000 2,000,000
Gross profit to date 570,000 1,560,000 2,000,000
Gross profit in prior years (570,000) (1,560,000)
Gross profit for the year 570,000 990,000 440,000
Construction in progress - 12/31/x2 6,400,000

Progress billings - 12/31/x2 (4M + 3M) 7,000,000
Gross amount due to customer - 12/31/x2 600,000
➢ PFRS 15
Contract liability
4,000,000 Billings - 20x1
Revenue - 20x1 (see below) 2,400,000
Revenue - 20x2 (see below) 4,000,000 3,000,000 Billings - 20x2
600,000 12/31/x2

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20x1 20x2 20x3

Contract price 8,000,000 8,000,000 8,000,000
Revenue to date 2,400,000 6,400,000 8,000,000
Revenue in prior years (2,400,000) (6,400,000)
8. A
Solution:
20x1 20x2 20x3
Costs incurred to date 1,425,000 4,040,000 5,080,000
Expected total profit (loss) 250,000 (50,000) (80,000)
Multiply by: % of completion 30% N/A 100%
Profit (loss) to date 75,000 (50,000) (80,000)
Profit (loss) in prior years (75,000) 50,000
Profit (loss) for the year 75,000 (125,000) (30,000)

Percentage of completion (a) 30% 80% 100%
Revenue to date 1,500,000 4,000,000 5,000,000
Revenue in prior years (1,500,000) (4,000,000)
Construction costs 1,425,000 2,615,000 1,040,000
Gross profit (loss) for the year 75,000 (115,000) (40,000)
Loss provision/Reversal (10,000) 10,000
Net profit (loss) for the year 75,000 (125,000) (30,000)
(a) Costs incurred to date (1) 1,425,000 4,040,000 5,080,000


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Estimated total contract costs (2) 4,750,000 5,050,000 5,080,000

Percentage of completion (1) ÷ (2) 30% 80% 100%
9. C – see previous solution
10. C
Solution:
Step 1: Place given information in pro-forma computation:

20x1
(a) Costs incurred to date ?
Estimated costs to complete ?
(b) Estimated total contract costs 2,250,000
Percentage of completion (a) ÷ (b) 40%
Step 2: ‘Squeeze’ for missing information:

20x1
(a) Costs incurred to date (2,250,000 x 40%) 900,000
Estimated costs to complete ?
Step 3: ‘Squeeze’ some more:

20x1
(a) Costs incurred to date 900,000
Estimated costs to complete (2,250,000 – 900,000) 1,350,000

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11. A
Solution:
20x1 20x2
Costs incurred to date (a) 1,800,000
Estimated costs to complete, Dec. 31, 20x2 600,000
Estimated total contract costs (b) 2,250,000 2,400,000
Expected profit (loss) 750,000 600,000
Multiply by: % of completion (a) ÷ (b) 40% 75%
Profit (loss) to date 300,000 450,000
Profit recognized in prior years (given) - (300,000)
20x1 20x2
Contract revenue to date 1,200,000 2,250,000
Contract revenue in prior years - (1,200,000)
Contract revenue for the year 1,200,000 1,050,000
Cost of construction (squeeze) (900,000) (900,000)
12. C
Solution:
20x1 20x2 20x3
Costs incurred to date (a) 10,500,000 24,800,000 30,800,000
Multiply by: Cost + Var. fee (b) 115% 120% 120%
Estimated total contract price 34,500,000 37,200,000 36,960,000
Multiply by: % of completion (c) 35% 80% 100%
Revenue to date 12,075,000 29,760,000 36,960,000
Less: Revenue in prior yrs. - (12,075,000) (29,760,000)

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Cost of construction (10,500,000) (14,300,000) (6,000,000)

Gross profit for the year 1,575,000 3,385,000 1,200,000
(a) 20x1: 10,500,000
20x2: (10,500,000 + 14,300,000) = 24,800,000
20x3: (10,500,000 + 14,300,000 + 6,000,000) = 30,800,000
(b)
The 5% additional fee is included in 20x2 when it became highly probable
that it will be received.
(c) % of completion = Costs incurred to date ÷ Estimated total contract costs
13. C
Solution:
20x1 20x2
Estimated total contract costs (3,000,000) (3,000,000)
Expected gross profit on completion 1,000,000 1,000,000
Gross profit to date 350,000 900,000
Gross profit in prior years (350,000)
Gross profit for the year 350,000 550,000
20x1 20x2
Percentage of completion 35% 90%
Revenue to date 1,400,000 3,600,000
Revenue in prior years (1,400,000)
Revenue for the year 1,400,000 2,200,000
Construction costs (squeeze) (1,050,000) (1,650,000)
Gross profit for the year 350,000 550,000

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14. A
Solution:
20x1 20x2
Costs incurred to date 1,536,000 11,528,000
Divide by: Estimated total contract costs 12,800,000 13,100,000 (a)
(12.8M initial estimate + 300,000 additional costs from modification)

(a)
= 13,100,000
20x1 20x2
Total contract price 15,000,000 15,750,000 (b)
Expected total profit 2,200,000 2,650,000
Profit (loss) to date 264,000 2,332,000
Profit (loss) in prior years (264,000)
Profit (loss) for the year 264,000 2,068,000
(b) (15M original contract price x 105%) = 15,750,000
20x1 20x2
Revenue to date 1,800,000 13,860,000
Revenue in prior years (1,800,000)
Construction costs 1,536,000 9,992,000
Profit (loss) for the year 264,000 2,068,000

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15. C
Solution:
20x1 20x2
Construction in progress, ending balances 122,000 364,000
Contract costs incurred to date (a) (105,000) (297,000)
Profit to date 17,000 67,000
Profit in previous years - (17,000)
Profit for the year 17,000 50,000
(a) Contract costs incurred to date in 20x2 = (105,000 + 192,000) = 297,000.
20x1 20x2
Revenue for the year (squeeze) 122,000 242,000
Cost of construction (b) (105,000) (192,000)
Profit for the year 17,000 50,000
Under the ‘cost-to-cost’ method of measuring progress, the “cost of

(b)
construction” for a year is equal to the contract costs incurred during

that year.
Optional reconciliation:
➢ CIP as of 12/31/x2 of 364,000 less CIP as of 12/31/x1 of 122,000 =
242,000 revenue in 20x2
Accounts receivable
12/31/x1 100,000
Billing in 20x2 (420K - 100K) 320,000 120,000 Collection (squeeze)
300,000 12/31/x2

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PROBLEM 5: CLASSROOM ACTIVITY
ACTIVITY 1:
Solutions:
Step 1: Identify the contract with the customer
Requirement (a): YES, the contract qualifies for accounting under

PFRS 15 because all the requirements of “Step 1” are met (the
contract is approved; the rights of the parties and the payment terms
can be identified; the contract has commercial substance; and the
consideration is probable of collection.
Step 2: Identify the performance obligations in the contract
Requirement (b):
The promises to transfer the lot, to provide the house design and
to construct the house are treated as a single performance
obligation because the promised goods and services are not
individually distinct. That is, the customer:
a. cannot benefit from the goods and services individually
(Entity X does not regularly sell lots, house designs, and
construction services separately); and
b. the goods and services are not individually separable (each good
and service is an input to a combined output, which is the
house and lot, including the house design. These are highly
interrelated – the customer cannot purchase one without
necessarily purchasing the others).
Requirement (c):
The performance obligation is satisfied at a point in time because
it does not meet any of the criteria to be satisfied over time.
Criteria to be satisfied over time Analysis (for Entity X)

A performance obligation is satisfied
over time if one of the following
criteria is met:
a. The customer simultaneously Criteria (a) and (b) are not met

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receives and consumes the benefits because Entity X retains control of

provided by the entity’s the lot, the design, and the house
performance as the entity during the construction period. This
performs. precludes the customer from
b. The entity’s performance creates simultaneously receiving and
or enhances an asset that the consuming the benefits provided by
customer controls as the asset is the Entity X’s performance as Entity
created or enhanced. X performs. In case of default, Entity
X forfeits the properties in its favor.
c. The entity’s performance does Criterion (c) is not met because of the
not create an asset with an following reasons:
alternative use to the entity and a. Entity X’s performance creates
the entity has an enforceable right an asset with an alternative use.
to payment for performance This is evidenced by the fact that
completed to date. Entity X can resell forfeited
properties without much
modification because the design
is standard.
b. Entity X’s right to payment is
not directly correlated with
performance completed to date,
i.e., the monthly payments are
due irrespective of the stage of
completion of the house.
Step 3: Determine the transaction price

Requirement (d):
The transaction price is ₱6,000,000 minus 2% penalty for every
month of delay. Accordingly, the transaction price includes a
variable consideration.
❖ Accounting for the variable consideration

Entity X shall estimate the amount of the expected penalty and
deduct that amount from the ₱6M contract price but only after
subjecting the estimate to the “constraining estimates” principle of
PFRS 15.
However, since Entity X does not expect any delays on the
construction, Entity X is not required to do the foregoing until
there is a subsequent change in circumstances.
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❖ Significant financing
Since the installment payments are due within 1 year, Entity X
may choose not to discount the payments under the practical
expedient allowed under PFRS 15. However, Entity X is not
precluded under PFRS 15 from the nonetheless discounting the
payments if it chooses to do so.
Step 4: Allocate the transaction price to the performance

obligations
Requirement (e):
The transaction price is allocated entirely to the single
performance obligation of transferring the lot together with the
house design and the house.
Step 5: Recognize revenue when (or as) the entity satisfies a

performance obligation
Requirement (f):
Entity X recognizes revenue when control over the property
(house and lot) is transferred to the customer.
Requirement (e):
Apr. Cash (6M x 20%) 1,200,000
1,
Receivable (6M x 80%) 4,800,000
20x1
Contract liability 6,000,000
“Receivable” is debited instead of “Contract asset” because Entity X has an

unconditional right to the consideration, i.e., the contract is non-cancellable
and the installment payments are due at each month-end regardless of the
performance completed to date.
PFRS 15 states that, “A right to consideration is unconditional if only
the passage of time is required before payment of that consideration is due,
even if the amount is subject to refund in the future.”

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ACTIVITY 2:
Solutions:
Step 1: Identify the contract with the customer
Requirement (a): YES, the contract qualifies for accounting under

PFRS 15 because all the requirements of “Step 1” are met. (See also
discussion in Activity 1.)
Step 2: Identify the performance obligations in the contract

Requirement (b):
The promises to provide the various services (architectural,
engineering, electrical, plumbing and others) constitute a single
performance obligation because the services are not individually
distinct.
This is evidenced by the fact that each of the services
constitutes an integral part of the contract (see ARTICLE 6 of the
contract); each forming an input into the combined output, which is
the completed house – the one which the customer has contracted
Entity Y with. Furthermore, the customer’s decision of not
acquiring a specific service affects the other services because the
customer is precluded from subcontracting any of those services
(ART. 9).
Although the customer can benefit from each of the
services (as evidenced by the fact that Entity Y regularly sells each
service separately), that ability is limited because of the reasons
stated above.
❖ Satisfaction of the performance obligation

The single performance obligation is satisfied over time because
the criteria under PFRS 15 are met.
Criteria to be satisfied over time Analysis (for Entity Y)

A performance obligation is satisfied
over time if one of the following
criteria is met:
a. The customer simultaneously Criteria (a) and (b) are met because,
receives and consumes the benefits although Entity Y has the right to

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provided by the entity’s supervise the construction activity,

performance as the entity the customer retains ownership over
performs. any structure built on the lot. This is
b. The entity’s performance creates evidenced by the fact that, in case the
or enhances an asset (e.g., work contract is cancelled, any progress on
in progress) that the customer the contract inures to the benefit of
controls as the asset is created or the customer.
enhanced.
c. The entity’s performance does Criterion (c) is met because of the
not create an asset with an following reasons:
alternative use to the entity and a. The asset has no alternative use
the entity has an enforceable right to Entity Y because it belongs to
to payment for performance the customer during and after
completed to date. the construction.
b. Entity Y has an enforceable right
to payment for performance
completed to date because the
subsequent billings are based on
Entity Y’s progress on the
contract and if the contract is
cancelled, Entity Y has the right
to payment for any progress on
the contract.
Step 3: Determine the transaction price

Requirement (c):
The transaction price is equal to the fixed fee of ₱8,000,000.
❖ Accounting for the variable consideration

Not applicable.
❖ Significant financing
There is no significant financing component in the contract
because the payments are due within 2 weeks after billing.
Step 4: Allocate the transaction price to the performance

obligations

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Requirement (d):
The transaction price is allocated entirely to the single
performance obligation of completing the construction of the
house in accordance with the agreed specifications.
Step 5: Recognize revenue when (or as) the entity satisfies a

performance obligation
Requirement (e):
Entity Y recognizes revenue over the construction period based on
the measure of its progress towards the complete satisfaction of
the performance obligation. This requires Entity Y to determine an
appropriate method for measuring its progress. Because of
insufficient information given in the problem, the appropriate
measure of progress is presumed to be the “cost-to-cost” method
(an application of the inputs method).
Requirement (f):
Sept. Cash (8M x 15%) 1,200,000
1, 1,200,000
Contract liability
20x1
to record the mobilization fee received at
contract inception
Oct. to Contract costs 2,422,000

Dec.
Cash (or other appropriate accounts) 2,422,000
20x1
to record the contract costs
➢ The percentage of completion in 20x1 is computed as follows:

Total contract price 8,000,000
(a) Costs incurred to date 2,422,000
Estimated costs to complete (not needed)
(b) Estimated total contract costs (see ‘bill of materials’) 6,920,000
Expected gross profit from contract 1,080,000
Multiply by: Percentage of completion (a) ÷ (b) 35%
Gross profit earned to date 378,000
Less: Gross profit earned in previous years -
Gross profit for the year 378,000

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Dec. 20, Receivable (8M x 35%) 2,800,000

20x1
Contract liability 2,800,000
to record the first quarterly billing
Dec. 23, Cash (2.8M x 90%) 2,520,000
20x1 2,520,000
Receivable
to record the collection on the billing
➢ The revenue and cost of construction in 20x1 are computed as

follows:
Total contract price 8,000,000
Multiply by: Percentage of completion 35%
Revenue to date 2,800,000
Less: Revenue recognized in previous yrs. -
Revenue for the year 2,800,000
Cost of construction (squeezed) (2,422,000)
Gross profit for the year (see computation above) 378,000
❖ Year-end adjusting entries:

Dec. 31, Contract liability 2,800,000
20x1
Revenue 2,800,000
Dec. 31, Cost of construction 2,422,000
20x1
Contract costs 2,422,000
Requirement (h):
Entity Y
Statement of financial position
As of December 31, 20x1
Current assets
Receivable (2,800,000 - 2,520,000) 280,000
Total current assets 280,000
Current liabilities
Contract liability (1.2M + 2.8M – 2.8M) 1,200,000
Total current liabilities

1,200,000

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Entity Y
Statement of profit or loss
For the year ended December 31, 20x1
Revenue 2,800,000
Cost of construction (2,422,000)
Gross profit 378,000
Other operating expenses -
Profit for the year 378,000

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PROBLEM 6: FOR CLASSROOM DISCUSSION

1. B
2. D
3. D
4. B The goods and services are not distinct because they are not
separately identifiable from each other. This is evidenced by
the fact that the entity provides a significant service of
integrating the goods and services (the inputs) into the
hospital (the combined output) for which the customer has
contracted.
5. D
6. B
7. C Statements a, b and d are correct. The entity does not have a

right to payment for performance completed to date because
even though the payments are nonrefundable, the cumulative
amount of those payments is not expected, at all times
throughout the contract, to at least correspond to the amount
that would be necessary to compensate the entity for
performance completed to date. This is because at various
times during construction the cumulative amount of
consideration paid by the customer might be less than the
selling price of the partially completed equipment at that time.
Since the entity does not have a right to payment for
performance completed to date, the entity does not need to
assess whether the equipment would have an alternative use
to the entity. The performance obligation does not meet the
requirement to be satisfied over time; thus, it is treated as
satisfied at a point in time.
8. C (10M x 115%) = 11.5M
9. A
10. B

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11. Solution:
➢ Estimated total contract costs:

Direct materials 5,500,000
Direct labor 2,800,000
Costs of design directly related to the contract 200,000
Costs of technical assistance not directly related to the
contract (properly allocated) 50,000
Costs of rectification work chargeable to customer 300,000
Administrative costs reimbursable by the customer 130,000
Insurance costs 20,000
Construction overheads 1,000,000
Estimated total contract costs 10,000,000
➢ Total costs incurred to date:

Costs of materials used in the construction 3,000,000
Costs of construction labor 1,500,000
Costs of design directly related to the contract 100,000
Costs of technical assistance not directly related to the
contract (properly allocated) 25,000
Administrative costs reimbursable by the customer 120,000
Insurance costs 15,000
Construction overheads 240,000
Total costs incurred to date 5,000,000
Percentage of Total costs incurred to date

=
completion Estimated total contract costs
Percentage of completion = 5,000,000 ÷ 10,000,000

Percentage of completion = 50%

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12. Solutions:
Requirement (a):
➢ Gross profits
20x1 20x2 20x3
(a) Costs incurred to date 3,150,000 5,680,000 7,120,000
(b) Estimated total contract costs 7,000,000 7,100,000 7,120,000
Expected gross profit 3,000,000 2,900,000 2,880,000
Multiply by: % completion (a) ÷ (b) 45% 80% 100%
Gross profit earned to date 1,350,000 2,320,000 2,880,000
Less: Gross profit in prior yrs. - (1,350,000) (2,320,000)
Gross profit for the year 1,350,000 970,000 560,000
➢ Revenues
20x1 20x2 20x3
Multiply by: % of completion 45% 80% 100%
Revenue to date 4,500,000 8,000,000 10,000,000
Less: Revenue recognized in prior yrs. - (4,500,000) (8,000,000)
Cost of construction * (3,150,000) (2,530,000) (1,440,000)
Gross profit for the year 1,350,000 970,000 560,000
* Equal to the contract costs incurred per year (or simply ‘squeezed’):
20x1: 3,150,000
20x2: (5,680,000 – 3,150,000) = 2,530,000
20x3: (7,120,000 – 5,680,000) = 1,440,000
➢ 20x1
(b) Billing:

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(c) Collection:
Cash 3.6M Cash 3.6M
Revenue 4.5M
➢ 20x2
Construction in progress 2.53M(a) Contract costs 2.53M
Cash 4.5M Cash 4.5M
Construction in progress 970K Revenue 3.5M
Revenue 3.5M
(a) (5,680,000 costs incurred to date in 20x2 – 3,150,000 costs incurred in 20x1) = 2,530,000
➢ 20x3
Construction in progress 1.44M(b) Contract costs 1.44M
Cash 1.9M Cash 1.9M
Cost of construction 1.44M Contract liability 2M
Construction in progress 560K Revenue 2M
Revenue 2M
(b)(7,120,000 costs incurred to date in 20x3 – 5,680,000 costs incurred to date in 20x2) =
1,440,000

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 The ₱500K debit balance in the contract liability account on 12/31/x1 is presented
as contract asset.

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13. Solution:
Requirement (a):
20x1 20x2 20x3
Revenue (a) 3,150,000 2,530,000 4,320,000
Contract costs incurred per yr.(b) (3,150,000) (2,530,000) (1,440,000)
Gross profit for the year - - 2,880,000
(a)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 (10M – 3.15M – 2.53M = 4.32M).
(b) 20x1: 3,150,000

20x2: (5,680,000 – 3,150,000) = 2,530,000
20x3: (7,120,000 – 5,680,000) = 1,440,000

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➢ 20x1
(b) Billing:
(c) Collection:
Cash 3.6M Cash 3.6M
➢ 20x2
Construction in progress 2.53M(a) Contract costs 2.53M
Cash 4.5M Cash 4.5M
(a) (5,680,000 costs incurred to date in 20x2 – 3,150,000 costs incurred in 20x1) = 2,530,000
20x3
Construction in progress 1.44M(b) Contract costs 1.44M
Cash 1.9M Cash 1.9M

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Revenue 4.32M
(b)(7,120,000 costs incurred to date in 20x3 – 5,680,000 costs incurred to date in 20x2) =
1,440,000

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14. Solution:
The contract is analyzed as follows:
20x1 20x2 20x3
Contract price 8,000,000 8,000,000 8,000,000
Costs incurred to date (a) 2,850,000 6,520,000 8,120,000
Expected profit (loss) 875,000 (150,000) (120,000)
(a) 20x1:
2,850,000
20x2: (2.85M + 3.67M) = 6,520,000
20x3: (2.85M + 3.67M + 1.6M) = 8,120,000
❖ The contract becomes onerous in 20x2.
20x1 20x2 20x3

Estimated total contract costs (7,125,000) (8,150,000) (8,120,000)
Expected profit (loss) 875,000 (150,000) (120,000)
Multiply by: % of completion (b) 40% N/A 100%
Profit (loss) to date 350,000 (150,000) (120,000)
Profit (loss) in prior yrs. - (350,000) 150,000
Profit (loss) for the year 350,000 (500,000) 30,000

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(b) 2.85M costs incurred in 20x1 ÷ 7.125M estimated total contract costs = 40% complete
Checking: 350,000 – 500,000 + 30,000 = -120,000 actual total loss on contract
The amounts recognized in profit or loss are computed as follows:

20x1 20x2 20x3
Multiply by: % of completion (c) 40% 80% 100%
Revenue to date 3,200,000 6,400,000 8,000,000
Revenue in prior years - (3,200,000) (6,400,000)
Costs of construction (2,850,000) (3,670,000) (1,600,000)
Gross profit (loss) for the year 350,000 (470,000) -
Loss on onerous contract (d) - (30,000) -
Gain on reversal of provision 30,000
Profit (loss) for the year 350,000 (500,000) 30,000
(c) 6.52M costs incurred to date in 20x2 ÷ 8.15M estimated total contract costs in 20x2 =
80% complete
(d) 500,000 required loss – 470,000 = 30,000 loss provision
15. Solutions:
The gross profits in 20x1 and 20x2 are computed as follows:

20x1 20x2
Total contract price (1) 6,000,000 6,500,000
(a) Costs incurred to date (2) 1,350,000 3,610,000
Estimated costs to complete (given) 2,400,000 190,000
(b) Estimated total contract costs 3,750,000 3,800,000
Expected gross profit from contract 2,250,000 2,700,000
Multiply by: Percentage of completion (a) ÷ (b) 36% 95%
Gross profit earned to date 810,000 2,565,000
Less: Gross profit earned in previous years - (810,000)
Gross profit for the year 810,000 1,755,000

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(1) The bonus is included in the transaction price only in 20x2 when it became highly
probable that Zevrek Co. will receive the bonus. The transaction price in 20x2 is
computed as (6M contract price + 500,000 bonus = 6,500,000).
The costs incurred to date in 20x2 is computed as (1.35M costs in 20x1 + 2.26M costs
(2)
in 20x2) = 3.61M.
The revenues in 20x1 and 20x2 are computed as follows:

20x1 20x2
Multiply by: Percentage of completion 36% 95%
Revenue to date 2,160,000 6,175,000
Less: Revenue recognized in previous yrs. - (2,160,000)
Gross profit for the year 810,000 1,755,000
16. Solution:
20x1 20x2
Expected total profit from construction 4,000,000 4,000,000
Gross profit to date 1,680,000 3,200,000
Gross profit recognized in prior years - (1,680,000)
Gross profit for the year 1,680,000 1,520,000
20x1 20x2
Revenue to date 4,200,000 8,000,000
Revenue in prior years - (4,200,000)
Revenue 4,200,000 3,800,000
Gross profit for the year (see above) 1,680,000 1,520,000
Impairment loss on receivable (4% x 10M) (400,000)
Profit for the year 1,680,000 1,120,000

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Notes:
 Unlike the cost-to-cost method, under the output method, the cost of
construction is not equal to the actual costs incurred in that period.
 If the uncertainty in the collectability of contract revenue arises
subsequent to contract inception, the uncollectability is accounted for as
impairment of receivable and/or contract asset.

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PROBLEM 2: MULTIPLE CHOICE – THEORY

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(1) 20x1: 8,160,000

Requirement (b): Journal entries

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Requirement (c): Financial statements

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Requirement (b): Journal entries

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Requirement (c): Financial statements

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PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. B 20M x 2/16 = 2,500,000

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computed as follows: (6,300,000 - 3,900,000 = 2,400,000).

5. A – No revenue, cost of construction and gross profit are

(a) Costs incurred to date 3,000,000 8,364,000 12,280,000

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20x1 20x2 20x3

Construction in progress - 12/31/x2 6,400,000

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20x1 20x2 20x3

Total contract price 5,000,000 5,000,000 5,000,000

(a) Costs incurred to date (1) 1,425,000 4,040,000 5,080,000

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Estimated total contract costs (2) 4,750,000 5,050,000 5,080,000

9. C – see previous solution

Step 1: Place given information in pro-forma computation:

Step 2: ‘Squeeze’ for missing information:

Step 3: ‘Squeeze’ some more:

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Cost of construction (10,500,000) (14,300,000) (6,000,000)

(c) % of completion = Costs incurred to date ÷ Estimated total contract costs

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(12.8M initial estimate + 300,000 additional costs from modification)

(b) (15M original contract price x 105%) = 15,750,000

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(a) Contract costs incurred to date in 20x2 = (105,000 + 192,000) = 297,000.

Under the ‘cost-to-cost’ method of measuring progress, the “cost of

construction” for a year is equal to the contract costs incurred during

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PROBLEM 5: CLASSROOM ACTIVITY

Step 1: Identify the contract with the customer

Requirement (a): YES, the contract qualifies for accounting under

Step 2: Identify the performance obligations in the contract

Criteria to be satisfied over time Analysis (for Entity X)

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receives and consumes the benefits because Entity X retains control of

Step 3: Determine the transaction price

❖ Accounting for the variable consideration

Step 4: Allocate the transaction price to the performance

Step 5: Recognize revenue when (or as) the entity satisfies a

“Receivable” is debited instead of “Contract asset” because Entity X has an

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Step 1: Identify the contract with the customer