Chapter 7:

1. Define and discuss briefly the concept of construction contract.

a. Construction contract is a contract specifically negotiated for the construction of an asset or
a combination of assets that are closely interrelated or interdependent in terms of their
design, technology and function of their ultimate purpose or use.

-Construction contract are generally long term. The date at which the contract is
completed normally fall on different financial reporting periods. The primary issue in the
accounting for construction contracts therefore, is the timing of recognition of contract
revenue and contract cost.
2. Contrast over time and at a point in time at contract perception
A. A performance obligation is satisfied over time if one of the following criteria is met.
a. The customer simultaneously receives and consumes the benefits provided by the
entity’s performance as the entity performs.
b. The entity’s performance creates or enhances an asset (e.g. work in progress) that the
customer controls as the asset is created or enhanced.
c. The entity’s performance does not create an asset with an alternative use to the entity
and the entity has an enforceable right to payment for performance completed to date.

* For the entity’s performance obligation to be satisfied over time, paragraph (c) also requires
the entity to have an enforceable right to payment for performance completed to date.

B. If the entity cannot demonstrate that a performance obligation is satisfied over time, it is
presumed that the performance obligation is satisfied at a point in time.

3. Discuss the concept of Fixed price contract

a. Fixed Price Contract – is a construction contract in which the contractor agrees to a fixed
contract price, or a fixed rate per unit of output, which in some cases is subject to cost escalation
clauses.

4. Discuss the concept of the methods of measuring progress

The entity shall use a single method of measuring progress consistently for each performance
obligation satisfied over time and shall measure its progress at the end of each reporting period.
Appropriate methods of measuring progress include:

a. Output Methods
b. Input Methods – recognize revenue on the basis of efforts or inputs expended relative to the
total expected inputs needed to fully satisfy a performance obligation. Examples include: Cost
incurred, Resources consumed, labor hour expended, machine hours used, time elapsed.

5. Discuss the concept of percentage of completion method

a. The percentage of completion is determined as the ratio of total costs incurred to date over the
estimated total contract costs.
 Formula #1:

Percentage of completion = Total Cost incurred to date

Estimated total contract costs

 Total Cost incurred to Date – include the cumulative cost incurred on the contract from the
interception of construction up to the end of the current reporting period.
 Estimated Total Contract Costs – pertain to the forecasted total cost of completing the
construction contract. Total estimated contract cost may also be determined as the sum of total
costs incurred to date plus the estimated costs to complete.
 Estimated cost to Complete – pertain to the anticipated additional contract costs required to
fully complete the contract at a schedule time.

Formula #2: Variation

Percentage of Completion = Total Cost incurred to Date

(Total Cost Incurred to Date
+
Estimated cost to complete)