Use the following information for the next three questions:

Information on Red Hot Co.’s construction contracts with customers which commenced during 20x1
is shown below:
Contract Contract
  1 2
Contract price 420,000 300,000
Costs incurred during the
year 240,000 280,000
Estimated costs to complete 120,000 40,000
Progress billings 150,000 270,000
Collections 90,000 250,000

1. At contract inception, Red Hot Co. assessed that its performance obligation in each of Contract 1
and Contract 2 is satisfied over time. Red Hot Co. uses the ‘cost-to-cost’ method in measuring its
progress on the contract. How much total profit (loss) is recognized from the two contracts in
20x1?

2. At contract inception, Red Hot Co. assessed that its performance obligation in each of Contract 1
and Contract 2 is satisfied over time. However, Red Hot Co. determined that the outcome of the
performance obligation in each of the contracts cannot be reasonably measured but contract
costs incurred are recoverable. How much total profit (loss) is recognized from the two contracts
in 20x1?

3. At contract inception, Red Hot Co. assessed that its performance obligation in each of Contract 1
and Contract 2 is satisfied at a point in time, that is, when the construction is completed. How
much total profit (loss) is recognized from the two contracts in 20x1?

4. VALEDICTION Construction Co. entered into an ₱80M fixed price contract for the construction
of a private road for FAREWELL SPEECH, Inc. The performance obligation on the contract is
satisfied over time. VALEDICTION measures its progress on the contract using the “cost-to-
cost” method. The estimated total contract cost is ₱40M. VALEDICTION incurred the following
costs in the first year of the construction:
Costs of negotiating the contract (charged immediately
as expense) 400,000
Costs of materials used in construction 12,000,000
Costs of materials purchased but not yet used in
construction 2,000,000
Site labor costs 4,000,000
Site supervision costs 800,000
Depreciation of equipment used in construction 480,000
Depreciation of idle equipment not used in the
contract 240,000
Costs of moving equipment and materials to and from
the construction site 160,000
Costs of hiring equipment 560,000
 Advance payment to subcontractor (the subcontracted
work is not yet started) 80,000
How much revenue is recognized in the first year of the contract?

Use the following information for the next two questions:

On July 1, 20x1, Contractor Co. enters into a contract with a customer for the construction of a
building. At contract inception, Contractor Co. assesses the contract in accordance with the
principles of PFRS 15 and concludes that it has a single performance obligation that is satisfied over
time. Contractor Co. then determines that the appropriate measure of its progress on the contract is
input method based on costs incurred. Information on the contract is shown below:

Contract price 600,000

Contract costs incurred during 20x1 120,000
Estimated remaining costs as of Dec. 31,
20x1 240,000
Billings to the customer during 20x1 180,000
Collections on billings during 20x1 60,000

5. What amount of revenue is recognized on the contract in 20x1?

6. What amounts is presented in Contractor Co’s. statement of financial position under: PFRS 15?

Use the following information for the next two questions:

In 20x1, ABC Co. was contracted to build a railroad. The contract price is equal to the construction
costs incurred plus 20% thereof. However, if the project is completed within 4 years, ABC will
receive an additional payment of ₱200,000. Information on the project is shown below:

  20x1 20x2 20x3

Costs incurred to date 2,400,000 4,575,000 6,125,000
Estimated costs to complete 3,600,000 1,525,000 125,000

In 20x1 and 20x2, it was not highly probable that the project will be completed on time. However, in
20x3, ABC assessed that project will be completed earlier than originally expected and thus it is now
highly probable that the incentive payment will be received.

7. How much revenue is recognized on the contract in 20x3?

8. How much profit is recognized on the contract in 20x3?

The entity uses an input method based on costs incurred to measure its progress towards complete
satisfaction of the performance obligation. The customer obtains control of the elevators when they
are delivered to the site in December 20X2, although the elevators will not be installed until June
20X3. The costs to procure the elevators are significant relative to the total expected costs to
completely satisfy the performance obligation. The entity is not involved in designing or
manufacturing the elevators.

As of December 31, 20X2, the entity has incurred total costs of ₱500,000, excluding the cost of the
elevators.

9. How much revenue is recognized in 20X2?

10. How much profit is recognized from the contract in 20X2?

11. An entity, a construction company, enters into a contract to construct a commercial building for
a customer on customer-owned land for a promised consideration of ₱1 million and a bonus of
₱200,000 if the building is completed within 24 months. The entity accounts for the promised
bundle of goods and services as a single performance obligation satisfied over time because the
customer controls the building during construction. At the inception of the contract, the entity
expects the following:
Transaction price ₱1,000,000
Expected costs 700,000
Expected profit (30%) 300,000

At contract inception, the entity does not expect to receive the bonus because it cannot conclude that
it is highly probable that a significant reversal in the amount of cumulative revenue recognized will
not occur. Completion of the building is highly susceptible to factors outside the entity’s influence,
including weather and regulatory approvals. In addition, the entity has limited experience with
similar types of contracts.

The entity determines that the input measure, on the basis of costs incurred, provides an appropriate
measure of progress towards complete satisfaction of the performance obligation.

Information as of the end of the first year is as follows:

Costs incurred to date ₱420,000
Total expected costs ₱700,000

The entity reassesses the variable consideration and concludes that the amount is still constrained.

In the first quarter of the second year, the parties to the contract agree to modify the contract by
changing the floor plan of the building. As a result, the fixed consideration and expected costs
increase by ₱150,000 and ₱120,000, respectively. In addition, the allowable time for achieving the
₱200,000 bonus is extended by 6 months to 30 months from the original contract inception date. At
the date of the modification, on the basis of its experience and the remaining work to be performed,
which is primarily inside the building and not subject to weather conditions, the entity concludes
that it is highly probable that including the bonus in the transaction price will not result in a
significant reversal in the amount of cumulative revenue recognized. In assessing the contract
modification, the entity concludes that the remaining goods and services to be provided using the
modified contract are not distinct from the goods and services transferred on or before the date of
contract modification; that is, the contract remains a single performance obligation.

How much is the cumulative catch-up adjustment to revenue recognized on the date of contract
modification?