Professional Documents
Culture Documents
CONSTRUCTION ACCOUNTING
What is a 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
or function or their ultimate purpose or use.
Two Types of Construction Contract or Contract Price:
1. 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
2. Cost-plus Contract – is a construction contract in which the contractor is reimbursed for allowable
or otherwise defined costs, plus a percentage of these costs or a fixed fee.
Long-term contracts frequently provide that seller (builder) may bill the customer at intervals. The most
common examples are as follows:
• Development of military and commercial aircraft
• High-rise buildings
• Skyways, roads, and bridges
• Weapons-delivery systems
• Space exploration hardware
Sellers should evaluate these indicators individually and in combination to decide whether control has been
transferred and revenue can be recognized.
Under PFRS 15, the loss in Current Period on a Profitable Contract and Loss on an Unprofitable Contract are
similarly accounted for.
Profitable Contract – Loss in Current Period. This situation happens when, during the construction, there is a
significant increase in the estimated total contract costs but the increase does not eliminate all profits on
the contract.
During 2020 the customer agrees to a variation with increases expected revenue from the contract by
P10,000 and causes additional costs of P5,000. At the end of 2020 there are materials stored on site for use
during the following period (2021) which cost P4,000*.
20x4 20x5
Costs incurred to date . . . . . . . . . . P4,920,000 P8,640,000
Estimated costs to complete . . . . 4,920,000 2,160,000
Billings made to date . . . . . . . . . . . 5,280,000 8,700,000
Collections made to date . . . . . . . 4,920,000 8,700,000
Compute the amount of construction in progress (net)/contract assets or progress billings (net)/contract
liabilities for the year 20x5:
Percentage-of-completion Cost Recovery Method
Method (Over Time) of Construction Accounting (Point In Time)
a. P780,000 -- liabilities P 780,000 – liabilities
b. 780,000 – assets 780,000 – assets
c. 60,000 – liabilities 60,000 – liabilities
d. 636,000 – liabilities 636,000 – liabilities
By December 31, 2019, three-quarters of the bridge was completed which was estimated by the
company’s engineering department; whereupon the third billing was made (cash had been made on the
previous two billings).
During 2019, a total of P8,400,000 had been paid for costs incurred, and total liability for construction
materials purchased still amounted to P2,000,000. It is estimated that an additional P3,600,000 would be
required to complete the construction of the bridge.
Because the information is incomplete, you are asked the following questions assuming the percentage-
of-completion method is used; an output measure (sales basis) is used to estimate the percentage
completed, and revenue is recorded using the actual cost approach.
1. How much gross profit should be reported in 2019?
2. How much revenue should be reported in 2020?
3. How much revenue should be reported in 2021?
4. How much cost was incurred in 2021?
5. The total costs of the contract?
6. What would be the construction revenue, costs of revenue and gross profit for 2019 and 2020
assuming that in 2019, the outcome of the construction contract cannot be estimated reliably (no
estimated cost to complete). (Ignore the revenue amount shown for 2019 and gross profit amount
reported for 2020.)
7. What would be the gross profit for 2020 if the cost-to-cost percentage-of-completion method/input
method (cost basis) were used rather than the output measure assuming that the estimated cost
to complete in 2019 amounted to P450,000? (Ignore the revenue amount shown for 2019 and gross
profit amount reported for 2020.)
*The only thing that stands between a man and what he wants from life is often merely the will to try it
and the faith to believe that it is possible.*
*Don’t be afraid of shortcomings, because they are what will make you better. Stay on the right track,
Continue to pray and things will work out for you.*
*It is better to fail in doing something, than to excel in doing nothing.*
*For even a flawed diamond is more valuable than a perfect brick. And people who
have no failures also have few victories.*
*Sometimes a winner is just a dreamer who never gave up.*
*The spirit, the will to win, and the will to excel are the things that endure.*
*These qualities are so much important than the events that occur.*
*A dream unrealized is a dream imprisoned by that enemy of all enemies, the fear of failure.
Set that dream free by determining that you will make it happen.*
*Don’t let your learning lead to knowledge; let your learning lead to action.*
*Every great success was, at the beginning impossible*
*The secret of life is not just to live, but to have something worthwhile to live for.*
*Great achievements are not done by strength but by perseverance*
*No one knows what he can do until he tries*
*Not knowing when the dawn will come, I open every door*
*The great thing in the world is not so much where you are but in what direction you are going*
*No act of kindness, no matter how small is ever wasted.*
*One individual plus courage is a majority.*
*Never take direction from a crowd for your personal life.*
*And never choose to quit just because somebody disagrees with you*
Your mind was framed to succeed
Your hand was armed with skill,
Your face was the mould of great faith and courage,
And your HEART with the throne of will.
2021
Revenue (P510,000 x 100%) 510,000 377,400 132,600
Cost (P392,500 x 100%) 392,500 296,000 ***96,500
Gross Profit (P117,500 x 100%) 117,500 81,400 36,100
2020
Revenue (equivalent to Costs Incurred) 296,000 140,000 156,000
Cost 296,000 140,000 156,000
Gross Profit -0- -0- -0-
2021
Revenue 510,000 296,000 214,000
Cost 392,500 296,000 96,500
Gross Profit 117,500 -0- 117,500
Problem IV – PJD Construction
2019
Contract Price 4,000,000
Less: Total Estimated Cost
Cost Incurred Each Year
+: Cost Incurred in Prior Years
Cost Incurred to Date
+: Estimated Cost to Complete
Total Estimated Cost
Estimated Gross Profit
X: Percentage of Completion (CI to date/TEC)
Recognized Gross Profit to Date
Less: Recognized Gross Profit in Prior Yr(s)
RGP (L) Each Year - % of Completion Method
Problem V – DJ Builders
2019 2020 2021
Contract Price 2,000,000 2,000,000 2,000,000
Less: Total Estimated Cost
Cost Incurred Each Year 360,000 ? 820,000
+: Cost Incurred in Prior Years _____0__ _______ _______
Cost Incurred to Date 360,000
+: Estimated Cost to Complete _______ ? _______
Total Estimated Cost _______ _______ _______
Estimated Gross Profit ?
X: Percentage of Completion (CI to date/TEC) ?
Recognized Gross Profit to Date _______ _______ _______
Less: Recognized Gross Profit in Prior Yr(s) _______ _______ _______
RGP (L) Each Year - % of Completion Method 40,000 140,000 (20,000)
2019
Revenue
Cost
Gross Profit
2019
Revenue
Cost
Gross Profit
***********************
Whatever is expressed is impressed. Whatever you say to yourself, with emotion, generates thoughts, ideas and behaviors consistent with those words
Be not afraid of life. Believe that life is worth living and your belief will help create the fact.
Develop an attitude of gratitude, and give thanks for everything that happens to you, knowing that every step forward is a step toward achieving something bigger and better
than your current situation.
The remarkable thing we have is a choice every day regarding the attitude we will embrace for that day. We cannot change our past... We cannot change the fact that people
will act in a certain way. We cannot change the inevitable. The only thing we can do is play on the one string we have, and that is our attitude.
Attitude is more important than the past, than education, than money, than circumstances, than what people do or say.
It is more important than appearance, giftedness, or skill.
The only way to find the limits of the possible is by going beyond them to the impossible.
Nothing great will ever be achieved without great mean, and men are great only if they are determined to be so.