' Loug Toon Costescton Qutracts 154 Long Term Construction Contracts | PAS 11 defines Construction Contract as a contract specifically negotiated for the construction of 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. Examples of construction contracts include those negotiated for the construction of highways, buildings, oil rigs, industrial units, pipelines, airlines and other similar assets 2 Types of Construction Contract - 1, Fixed Price Contract — is a contract in which the contractor agrees to a fixed contract price or a fixed rate per unit of output, which in some cases are subject to cost escalation cost. 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 rate. Combining and Segmenting Construction Contract The provisions of the standard usually are applied to individual construction contracts. Sometimes, it becomes necessary to account for a group of related contracts as one or to segment in separate parts, one contract so that the substance of the transactions be properly reflected rather than its form A. Segmenting one contract - when a contract covers for the construction of each asset shall be considered a separate contract when: Separate proposals have been made for each asset. 2. Each asset has been subject to separate negotiation and both contractor and customer were able to accept or reject that part of the contract to each asset and 3. The costs and revenues of each asset are separately identifiable. B. Separate Contracts are Combined — when a group of contract, each with a single or even with different customers, shall be treated as a single contract when: The group of contracts is negotiated as a single package. 2. The contracts are so closely interrelated that they are effectively part of one project with one overall profit margin and 3. The contracts are performed either concurrently or in a continuous process. Recognition of Contract Revenues and Contract Cost 1. Contract Revenues - It is comprised of Initial Contract Price agreed in the contract together with (1) Variation in the contract, (2) Claims/penalty, and (3) Incentive payments to the extent that is probable that they will result in revenue and they are capable of being reliably measured. p>2. Long Term Construction Contracts 152 Contract Costs - it is comprised of (1) costs that relate directly to the specific contract, (2) costs that are attributable to contract activity in general and can be allocated to contracts and (3) such other costs as specifically chargeable under the terms of the contract. Methods of Realizing Profit in Construction Accounting a Percentage of Completion Method - is used when the outcome of the construction contract can be estimated reliably contract revenue and cost associated with the contract should be recognized as revenue and expenses, respectively, by reference to the stage of completion of the contract activity at the balance sheet date. ‘To be able to estimate the outcome of a contract reliably, the entity must be able to make a reliable estimate of total contract revenue, the stage of completion, and the costs to complete the contract Different Methods of Measuring Stage of Completion ‘A. Input Measures ~ this are made in relation to the costs or efforts devoted to a contract. 1. Cost to Cost Method - it is computed based on the proportion of contract cost incurred for the work performed to date bear to the total estimated costs to complete the contract. Stage of Completion %= Cost ineut dat Total estimated cost to complete the contract 2. Effort Expended Method - this is based on survey of work performed. Output Measures - this are made in terms of result achieved. This is based ‘on the completion of physical proportion of the contract work. Architect, or Engineers are sometimes asked to evaluate jobs and estimate what percentage of job or contract is completed. Value of work completed in proportion to total contract price. The value of the work may be determined by conducting surveys of work performed. Stage of Completion %= Value of Work Certified as complete Total Expected Production or Usage Physical units of work completed in comparison with the total number of units to be completed under the contract. Stage of Completion %= Physical Units of Work Completed Total Number of Units as per ContractLong Term Construction Coutracts 153 3 Proportional Costs Approach - the cost incurred computed under this * Tnethod may not equal to the actual costs incurred. 4, Actual Cost Approach — the costs incurred computed under this * ‘nethod should be equal to the cost actually incurred. Note: The proportional cost and Actual Cost approach are equally acceptable, " since the actual costs approach gross profit. varies from period to period ad occur if the cost to cost methods are used, then the proportional cost approach is preferable. g. Cost Recovery Method / Zero Profit Method - this method is used when the outcome of the construction contract cannot be reliably measured. when this method is used: 2 t. Revenue should be recognized only to the extent of the contract cost * incurred that is probable will be recoverable; and Contract cost should be recognized as an expense in the period in which they are incurred. Recognition of Anticipated Losses When it is probable that total contract costs will exceed total contract revenue, the anticipated loss should be recognized as an expense (or loss) immediately. ‘The amount of loss is determined irrespective of: 1. Whether or not the work has commenced on the contract 2. The stage of completion of contract activity 3. The amount of profits expected to arise on other contracts which are not treated as a single construction contract. Contract Cost that relate to future activity The cost of materials that have been delivered to but set aside for in the contract but not yet installed, used or applied during the construction are excluded in computing the cost incurred to ‘date. Note: The progress payments and advances from customers often do not reflect the work performed. Progress Billing These are amounts billed for work performed on a contract whether or not they have been paid by the customerLong Term Construction Contracts 154 Contract Retention These are amounts of progress billings which are not paid until the satisfaction of conditions specified in the contract for the payment of such amounts or until defects have been rectified. Contract Retention ~ decreases the cash collection Entry: Cash Contract Retention AR Advances from customers ‘These are amounts received by the contractor before the related work is performed. Mobilization Fee : ‘This is part of contract price which is normally billed by the contractor to fund the initial phase of the construction and deductible on the subsequent billings. Mobilization Fee — increases the collection Entry: Cash Advances from customer PFRS 15 Revenue from Contracts with Customers PFRS 15 supersedes PAS 11 Construction Contracts Definition: is a contract specifically negotiated for the construction of an asset oe combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate use. summary of the Revenue Recognition Principle under PFRS 15 ‘The entity recognizes revenue by applying the following steps: 1. Identify the contract with the customer ‘The contract is with the customer and the collectability of the consideration is probable. ‘i Note: A contract with a customer is accounted for only when all of the following criteria are met: The contract is approved (in writing, orally or in accordance with other customary business practice) by both parties and are committed to perform their respective obligations. b. The entity can identify each party's rights regarding the goods or services to be transferred.Loug Term Construction Contracts 155 The entity can identify the payment terms for the goods or services to be transferred. The contract has commercial substance (the risk, timing or the amount of entity’s future cash flows is expected to change as a result of the contract); and i The consideration is probable of collection. In evaluating whether collectability of an amount of consideration is probable, an entity shall consider only the customer's ability and intention to pay that amount of consideration when it is due. Ce. the contract with the customer does not meet the criteria and an entity receives consideration from the customer, the entity shall recognize the consideration received as revenue only when either of the following events has occurred: When a. The entity has no remaining obligation to transfer goods or services and the consideration received is non-refundable. b, The contract has been terminated and the consideration received is non-refundable. Any consideration received from such contract is recognized as liability and will be recognized as revenue only when either of the following events above has occurred. Depending on the facts and circumstances relating to the contract, the liability recognized represents the entity's obligation to either transfer goods or services in the future or refund the consideration received. COMBINATION OF CONTRACTS An entity shall combine two or more contracts entered into at or near the same time with same customer (or related parties of the customer) and account for the contracts as a single contract if one or more of the following criteria are met: a. The contract are negotiated as a package with a single commercial objective; b. The amount of consideration to be paid in one contract depends on the price or performance of the other contract. c. The goods or services promised in the contracts (or some goods or services promised in each of the contracts) are a single performance obligation. CONTRACT MODIFICATIONS A contract modification is a change in the scope or price (or both) of a Contract that is approved by the parties to the contract. A contract modificationLoug Ferm Construction Contracts 156 may be described as a change order, a variation or an amendment. It exists when the parties to a contract approve a modification that either creates new or changes existing enforceable rights and obligations of the parties to the contract An entity shall account for a contract modification as a separate contract if both of the following conditions are present: a, The scope of the contract increases because of the addition of promised of goods or services that are distinct and b. The price of the contract increase by an amount of consideration that reflects the entity’s stand-alone selling prices of the additional promised goods or services and any appropriate adjustments to that price to reflect the circumstances of the particular contract. If the contract modification is not accounted for as a separate contract, an entity shall account for the promised goods or services not yet transferred at the date of the contract modification in whichever of the following ways is applicable a. It shall account for the contract modification as if it were termination of the existing contract and the creation of new contract, if the remaining goods or services are distinct from the goods or services transferred on or before that date of the contract modifications. The amount of consideration to be allocated to the remaining performance obligations is the sum of: i, The consideration promised by the customer (including amounts already received from the customer) that was included in the estimate of transaction price and that had not been recognized as revenue and ii, The consideration promised as part of the contract modification. b. It shall account for contract modification as if it were a part of the existing contract if the remaining goods or services are not distinct and, therefore, form part of a single performance obligation that is partially satisfied at the date of the contract modification. c. If the remaining goods or services are a combination of items (a) and (b), then the entity shall account the effects of the modification on the unsatisfied (including partially satisfied) performance obligations in the modified contract in a manner that is consistent with the objectives of the standard.. : Identify the performance obligations in the contract A contract includes promises to transfer goods or services to a customer. If those goods or services are distinct, the promises are performance obligations and are accounted for separately.Long Term Construction Contracts 157 At contract inception, an entity shall assess the goods or services promised in a contract with a customer and shall identify as a performance obligation each promise to transfer to the customer either: a. A good or service (or a bundle of goods or services) that is distinct; or b. A series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. A promise good or service is distinct: Pee I. The customer can benefit from the good or service either on its own or together with other resources that are readily available to customer. A customer can benefit from good or services if the goods or services could be used, consumed, sold for an amount that is greater than scrap value or otherwise held in a way that generates economic benefits. Il. The promise to transfer the good or service is separately identifiable from other promises in the contract. Apromise to transfer a good or service to a customer is separately identifiable if the good or service: a. It is not an input to produce or deliver the combined output specified by the customer. b. The goods or services does not significantly modify or customize another good or service promised in the contract. c. Is not highly dependent or highly interrelated with other goods or services. For example, the fact that a customer could decide to not purchase the good or service without significantly affecting the other promised goods or services in the contract. Note: If a promised good or service is not distinct, an entity shall combine that good or service with other promised goods or services until it identifies a bundle of goods or services that is distinct. This would result to treating all Promised of goods or services in a contract as a single performance obligation. Satisfaction of Performance Obligations An entity shall recognize revenue when (or as) the entity satisfies a Performance obligations by transferring good or service to a customer. An asset is transferred when (or as) the customer obtains control of the asset. The entity shall determine at a contract inception whether it satisfies the Performance obligation over time or point in time.eee ee eye Long Term Coustraction Coatracts 15g A. Performance obligation is satisfied OVER TIME if one of the followin, criteria is met: : 1. The customer simultaneously receives and consumes the benefit provided by the entity’s performance. 2. The entity’s performance creates or enhances an asset that the customer controls as the assets is created or enhanced. 3. The entity’s performance does not create an asset with alternative te the entity and the entity has enforceable rights to payment fer performance completed to date. An asset created by an entity’s performance does not have an alternative use to the entity if the entity is either restricted contractually from readily directing the assets for another use during the creation or enhancement of that asset or limited practically from readily directing the asset in its completed state for another use. The assessment of whether an asset has an alternative use to the entity is made at the contract inception. B. Performance Obligation satisfied at a Point in Time. If the entity cannot demonstrate that a performance obligation is satisfied over time, then it is presumed it is satisfied at a point in time. The entity shall consider the indicators of transfer of control, which include but not limited to, the followin, The entity has a present right to payment for the asset The customer has legal title to the asset ‘The entity has transferred physical possession of the asset The customer has the significant risks and rewards of ownership of the Boop asset . The customer has accepted the asset. 3. Determine the transaction price : The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services except mount collected on behalf of the third parties (for example, some sales taxes). The transaction price can be a fixed amount of customer consideration, but it may sometimes include variable consideration or consideration in a form other than cash. The transaction price is also adjusted for the effects of the time value of money if the contract includes a significant financing component and for any consideration payable to the customer.Long Term Construction Contracts 159 If the consideration is variable, an entity estimates the amount of consideration to which it will be entitled in exchange for the promised goods or services. The estimated amount of variable consideration will be included in the transaction price only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Transaction Price Itis the amount of consideration to which the entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). Transaction price consists of: a. The CONTRACT PRICE and b. Any SUBSEQUENT VARIATION IN THE CONTRACT PRICE that is probable that they will result in revenue and they are capable of being measured reliably. In determining the transaction price, an entity shall consider the effects of all of the following: i, Variable Consideration An amount of consideration may vary because of discount, rebates refunds, credits price concessions, incentives, performance bonuses, penalties or other similar items. It can also vary if an entity’s entitlement to the consideration is contingent on the occurrence or non-occurrence of a future event. 7 The entity shall estimate the amount of variable consideration by using cither of the following methods: a, The Expected Value — the expected value is the sum of all probability-weighted amounts in a range of possible considerations amounts. It is appropriate estimate if an entity has a large number of contracts with similar characteristics. b. The Most Likely Amount — the most likely amount is the single amount in a range of possible consideration amounts. It is appropriate estimate if the contract has only two possible outcomes (for example, an entity either achieves a performance bonus or not). Constraining estimates of variable consideration It shall only include in the transaction price some or all of an amount of variable consideration only to the extent that it is highly probableLong Term Construction Cantracts 160 that a significant ‘reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The existence of significant financing component in the contract An entity shall adjust the promised amount of consideration for the effects of the time value of money if the timing of payments agreed to by the parties to the contract provides the customer or the entity with significant benefit of financing the transfer of goods or services to the customer. iii, iv. Non-cash consideration The entity shall measure the non-cash consideration (or promise of non-cash consideration at fair value. If an entity cannot reasonably estimate the fair value, the entity shall measure the consideration indirectly by reference to the stand- alone selling prices of the goods or service promised in exchange for the consideration. If the customer contributes materials, equipment or labor to facilitate an entity’s fulfillment of the contract, the entity shall assess whether it obtains control of those contributed goods or services. The entity shall account the contributed goods or services as non-cash consideration received from customer. v. Consideration payable to customer It includes cash amount that an entity pays, or expects to pay, to the customer. It also includes credit or other items (for example coupon or voucher) that can be applied against the amount owed to the entity. It shall be accounted as a reduction of the transaction price and therefore, of revenue unless the payment to the customer is: in exchange for a distinct good or service that the customer transfers to the entity. Two types of Contract A. Fixed Price Contract — a contract in which the contractor agrees to a fixed amount of contract price or fixed rate per unit of output, which in some cases is subject to cost escalation clauses. Cost Plus Contract - a contract in which the contractor is reimbursed for allowable or otherwise defined costs plus a percentage of these costs or a fixed fee. 1. Cost plus variable fee contract = Reimbursable costs + (Reimbursable costs x rate %)Aoug Term Construction Qoatracts 161 2. Cost plus fixed fee contract = Reimbursable costs + fixed fee (ie. 1M reimbursable cost + 5M) Cost plus contract is used in case it is difficult for the contractor to quote the contract price because a. It is not possible to accurately estimate the scope of the project. b. There have been no prior similar projects that can be used as a basis for price quotation 4, Allocate the transaction price to the performance obligations in the contract The allocation is based on the relative stand-alone prices of the distinct goods or services promised in the contract. The entity shall determine the stand-alone selling price at contract inception of the distinct goo or service underlying each performance obligation in the contract and allocate the transaction price in proportion to those stand alone selling prices. The stand-alone selling price - is the price at which a promised good or service can be sold separately to a customer. If there is only one performance obligation in a contract, the transaction shall be allocated only to a single performance obligation. 5. Recognize revenue when the performance obligation is satisfied An entity recognizes revenue when (or as) it satisfies a performance obligation by transferring a promised good or services to a customer (which is when the customer obtains control of that good or service). The amount of revenue recognized is the amount allocated to the satisfied performance obligation. A. Revenue is recognized Over Time - revenue is recognized as the entity progresses towards the complete satisfaction of obligation. B. Revenue is recognized at a Point in Time - revenue is recognized when the entity completely satisfies the performance obligation. - No revenue is recognized during the construction period because the performance obligation is satisfied at a point in time. The whole transaction price is recognized as revenue when the construction is completed and the control over the promised goods is transferred to the customer. The cost incurred each year during the period are deferred and recognized in full only when the related revenue is recognizedLong Ferm Construction Contracts 162 Note: REVENUE IS MEASURED AT THE AMOUNT OF THE TRANSACTION PRICE ALLOCATED TO THE SATIFIED PERFORMANCE OBLIGATION. REASONABLE MEASURE OF PROGRESS é Revenue for a performance obligation satisfied over time is recognized only if the entity can reasonably measure its progress toward the complete satisfaction of the performance of obligation. If the entity cannot be reasonably measure outcome of a performance obligation, but the entity expects to recover the costs incurred in satisfying the performance obligation, the entity shall recognize revenue ONLY TO THE EXTENT OF THOSE COSTS INCURRED (ZERO PROFIT METHOD) until such time that it can reasonably measure the outcome of the performance obligation can be reasonably measured. Methods of Measuring Percentage of Completion The entity shall use a single method of measuring progress consistently for each performance obligation satisfied over time and shall remeasure its Progress at the end of each reporting period. INPUT METHODS - it-recognize revenue base on the efforts or inputs expended relative to the total expected inputs needed to fully satisfy a performance obligation. Examples of inputs are 1. Cost Incurred 3. Labor hours expended 2. Resources Consumed 4. Machine hours used A. B. OUTPUT METHOD - this is made in terms of results achieved. This is based on the completion of physical proportion of the contract work. Architect or Engineers are sometime asked to evaluate jobs and estimate what percentage of job or contract is completed. 1. Surveys of performance completed to date Appraisals of results achieved, milestones reached, time elapsed and 2. units produced or units delivered. COST INCURRED IN FULFILLING THE CONTRACT - capitalize or recognized as assets if ALL of the following criteria are met: A. The costs are directly related to a contract or specifically identifiable a. Direct Materials b. Direct labor c. Other costs that are incurred only because an entity entered into the contract, for example 1, Payment to subcontractors 2. Costs of moving plant, equipment and materials to and from the contract siteLong Term Coasbrection Crtracts 163 3. Cost of design and technical assistance that are directly related to the contract. 4. Costs that are explicitly chargeable to customer under the contract & Allocations of costs that relate directly to the contract or to contract activities: 1, Insurance 4 Depreciation of plant and equipment used on the contract a i n 3. Cost of design and technical assistance that are not directly related to a specific contract 4, Cost of contract management and supervision 5. Borrowing costs capitalized in accordance with PAS 23 6. Other construction overheads fg, The costs generate or enhance resources that will be used in satisfying the erformance obligation. i : c. Costs that expected to be recovered (reimbursable costs) RECOGNIZED AS EXPENSES WHEN INCURRED: TS rou? ion costs for which reimbursement is not specified in 1, General administrati the contract. Costs of wasted materials, labor or other resources that were not reflected in the price of the contract. Depreciation of idle plant and equipment that is not used on a particular contract. = Cost that relate to satisfied or partially satisfied performance obligation in the contract (ie. Cost that relate to past performance). 5, Cost for which an entity cannot distinguish whether the costs relate to unsatisfied performance obligation or to satisfied or partially satisfied performance obligation. 6. Selling costs or Marketing Costs 7. Research and development costs for which reimbursement is not specified in the contract. Note: Any INCIDENTAL INCOME FROM THE CONSTRUCTION that is not included in contract revenue shall be accounted for as REDUCTION OF CONTRACT COSTS. (i.e. Income from the sale of excess materials, scrap and gain on sale of plant and equipment at the end of the contract shall be accounted for as reduction of contract costs.)a age ADJUSTMENTS TO THE MEASURE OF PROGRESS UNDER INPUT METHOD | When a cost incurred does not contribute to an entity’s progress in | j Loag Term Construction Coateacts 164 1. satisfying the performance obligation. Example: The entity excludes from the measurement of its progress the costs of significant inefficiencies such as wasted materials, labor and other resources that were not reflected in the contract price. When a cost incurred is not proportionate to the entity’s progress in satisfying the performance obligation. a. Advance payments to subcontractors for the subcontracted work has not yet been started, 2. b. Costs of materials that have been delivered to a contract site or set aside for use in a contract but not yet installed, used or applied during the contract performance. CONTRACT LIABILITY VS. CONTRACT ASSET When either party to a contract has performed, an entity shall present the contract in the statement of financial position as a contract asset or.contract lability, depending on the relationship between the entity’s performance and the customer's payment. An entity shall present any unconditional rights to consideration separately as RECIEVABLE. CONTRACT LIABILITY - is an entity’s obligation to transfer goods or services to customer for which the entity received consideration (or the amount is due) from the customer. It is recognized when: a. The entity receives a consideration before good or service is transferred to the customer. b. The entity has an unconditional right to the consideration before the goods or services is transferred to the customer. CONTRACT ASSET - an entity’s right to consideration in exchange for goods and services that the entity has transferred to a customer when that right is conditioned on something other than the passage of time (for example, the entity’s future performance). A contract asset (excluding amounts recognized as a receivable) is recognized when the goods or services is transferred to the customer before the consideration is received or become du RECEIVABLE - is an entity’s right to consideration that is unconditional. It is unconditional if only the passage of time is required before payment ofLong Term Construction Coatracts 165 consideration is due. For example, an entity would recognize a receivable if it has a present right to payment even if the amount may be subject to refund in the future. The entity shall account for a receivable in accordance with PERS 9. computation of Contract Price Contract Price Variable Consideration Variation in contract work: Claims/Penalty Incentive payments + Significant financing components (time value of money} Consideration payable to customers Rebates, discounts, coupons Non-Cash Considerations Materials, Equip, Labor received from customers and controlled by the entity Total Contract Price + Computation of Cost Incurred Direct Materials actually used Direct Labor Overhead Reimbursable costs (Chargeable cost to customer) Other costs incurred because the entity entered into the contract Payment to subcontractors Cost of moving plant, equipment, materials Cost of design and technical assistance directly related to the contract Allocated costs that relate directly to the contract Insurance Depreciation Cost of contract management and supervision Capitalizable borrowing costs PAS 23 Total Cost Incurred Mom Me ee oo ee Notes: 1. Materials and subcontracting costs not actually used part of estimated cost to complete 2. Cost of inefficiency - expense }. Incidental from construction — deduction to contract cost . Depreciation of idle plant or facility - ExpenseLong Term Construction Contracts 165 EXERCISES Problem 1: DMCI Construction Company was awarded a contract to construct a new sewage system for MWSS for a price of P6,000,000. The original estimate of cost to complete the contract was P4,200,000. The contract provides for periodic billings. Information on the contract follows: 2030 2031 2032 Costs Incurred to date 500,000 2,340,000 2,650,000 Estimated cost to complete 2,000,000 260,000 - Progress Billings 400,000 4,350,000 —_ 1,250,000 At the contract inception, DMCI assesses its performance obligations in the contract and determines that the promised of goods and services as a single performance obligation satisfied overtime in accordance with PFRS 15. DMCI concludes that an input measure using “cost to cost method” provides the appropriate measure of progress towards complete satisfaction of the performance obligation. : Req. 1. Which of the following statement is incorrect under PFRS 15? a, The total realized gross profit in 2032 is P290,000 b. The total construction in progress net of progress billings to be presented in the financial statement in year 2030 is P800,000 c. The total contract revenue to be credited in year 2031 is P5,400,000 d. The total construction in progress in year 2031 is P5,400,000 Assuming, at the contract inception, DMCI assesses its performance obligations in the contract and determines that the promised of goods and services as a single performance obligation satisfied overtime in accordance with PFRS 15. However, DMCI determines that the outcome of the performance obligations cannot be reasonably measured but expects to recover the contract costs incurred. Req. 2. Which of the following statement is incorrect under PFRS 15? a. The total construction in progress net of progress billings to be presented in the financial statement in the year 2030 is P100,000. The total realized gross profit in year 2032 is P3,350,000 The total construction in progress in year 2031 is P2,340,000 The contract cost to be credited in year 2030 is P500,000 aos Assuming, at the contract inception, DMCI assesses its performance obligations in the contract and determines that the promised of goods and services as a single performance obligation.Long Term Coes (rebate 167 cI retains control over the asset created in the contract. This prevents the DMT from simultaneously receiving and consuming the benefits provided by cient ity’s performance as the entity performs. Therefore, DMCI determines the the performance obligation is satisfied at a point in time. 3, Which of the following statement is correct under PFRS 15? Rea ye contract revenue recognized in year 2030 is 500,000. fhe contract cost recognized in the year 2031 is P1,750,000. ‘The contract revenue recognized in the year 2031 is P6,000,000. The realized gross profit in year 2032 is P3,350,000 answer 1) C2)D 3)D Suggested Solution: Req. 1 2030 Todate Prior Year Current Contract Price (6,000,000 x 20%) 1,200,000 : 1,200,000 Total Estimated Costs (2,500,000 x 20%) 500,000 : 500,000 Estimated Gross Profit (3,500,000 x 20%) 700,000 : 700,000 2031 To date Prior Year Current Contract Price (6,000,000 x 90%) 5,400,000 1,200,000 4,200,000 Total Estimated Costs (2,600,000 x 90%) — _2,340,000__500,000_1,840,000 Estimated Gross Profit (3,400,000 x 90%) 3,060,000 700,000 2,360,000 2032 Todate Prior Year Current Contract Price (6,000,000 x 100%) 6,000,000 5,400,000 600,000 Total Estimated Costs (2,650,000 x 100%) 2,650,000 2,340,000 __ 310,000 Estimated Gross Profit (3,350,000 x 100%) ~ 3,350,000 3,060,000 290,000 Req. 2 2030 Todate Prior Year Current Revenue 500,000 - 500,000 Cost 500,000 - 500,000 Profit 0 - 0 2031 Todate Prior Year Current Revenue 2,340,000 500,000 1,840,000 Cost 2,340,000 500,000 _ 1,840,000 Profit 0 0 0 2032 Todate Prior Year Current Revenue 6,000,000 2,340,000 3,660,000 Cost 2,650,000 2,340,000 _ 310,000 Profit 3,350,000 0 3,350,000Long Term Construction Coatracts 168 Req. 3 Prior 2030 To date Year Current Revenue 0 - 0 Cost oO - 0 Profit 0 = 0 Prior 2031 To date Year Current Revenue ° 0 0 Cost oO oO 0 Profit 0 0 0 Prior 2032 To date Year Current Revenue 6,000,000 ° 6,000,000 Cost + _2,650,000 o 2,650,000 Profit 3,350,000 0 3,350,000 Problem 2: German Construction Company began a construction project on a building for P3,000,000. The project was completed during 2031.German has an unconditional right to payment for performance completed to date. The accounting records disclosed the following: 2030 2031 Progress billing during the year 1,100,000 1,900,000 Cost incurred during the year 900,000 1,800,000 Collection on billing during the year 700,000 2,300,000 Estimated cost to complete 1,800,000 - At the contract inception, German assesses its performance obligations in the contract and determines that the promised of goods and services as a single performance obligation satisfied overtime in accordance with PFRS 15. German concludes that an input measure using “cost to cost method” provides the appropriate measure of progress towards complete satisfaction of the performance obligation. Which of the statement is incorrect under PFRS 15? a. The total construction in progress in year 2030 is 1,000,000. b. The receivable to be debited in year 2030 is 1,100,000. c. The contract asset to be presented in the financial statement in year 2030 is 100,000. d. The contract liability to be presented in the financial statement in year 2030 is 100,000.Long Term Csostuston Csetats 169 Answer B suggested Solution: Journal Entries 2030, 1. Construction in Progress 900,000 Cash 900,000 2, Receivable (3,000,000 x 1/3) 1,000,000 Contract Asset 100,000, Progress Billings 1,100,000 3. Construction in Progress 100,000 Construction cost 900,000 Construction Revenue 1,000,000 4. Cash “700,000 Receivable 700,000 Financial Statement 2030 Assets Receivable (1,000,000 - 700,000) 300,000 Contract Asset 100,000 Liability Contract liability (PB 1,100,000 - CIP 1,000,000) — 100,000 Problem 3: The DJ Construction Builders began work on a contract in 2030 and completed in the year 2031. The total contract price was P4,200,000. DJ has an unconditional right to payment for performance completed to date. Information concerning the contract in the year 2030 follows: Cost Incurred during the year 600,000 Estimated cost to complete at end of the year 2,400,000 Billing during the year 720,000 Collection during the year 400,000 At the contract inception, DJ assesses its performance obligations in the contract and determines that the promised of goods and services as a single performance obligation satisfied overtime in accordance with PFRS 15. DJ concludes that an input measure using “cost to cost method” provides theLong Teun Construction Contracts 170 appropriate measure of progress towards complete satisfaction of the performance obligation. Which of the following statement is incorrect, under PFRS 15? a. The construction in progress net of progress billings to be presented in the financial statements in year 2030 is PO. ‘The total contract revenue to be credited is P840,000. b. c. The total receivable to be debited amounted to P840,000. d. The contract asset to be presented in the financial statements is P120,000. Answer A Suggested Solution: Journal Entries 2030 1. Construction in Progress 600,000 Cash 600,000 2. Receivable (4,200,000 x 20%) 840,000 Contract liability 120,000 Progress Billings 720,000 3. Construction in Progress 240,000 Construction cost 600,000 Construction Revenue 840,000 4. Cash 400,000 Receivable 400,000 Financial Statement 2030 Assets Receivable (840,000 - 400,000) 440,000 Contract Asset (CIP 840,000 - PB 720,000) 120,000 Liability Contract liability 120,000 Problem 4: On April 1, 2030, DJ Builders enters into a contract for construction of building for a contract price of P12,000,000 and a bonus of 1,000,000 if the building is completed within 2 years. At inception date, DJ expects total construction costs of P8,000,000, DJ determines that the promised of goods and services as a single performance obligation satisfied overtime because the customer controls the building during the construction. DJ uses cost to cost method to measure the progress towards complete satisfaction of the performance obligation.Long Term Construction Contracts 171 jn 2030, DJ cannot conclude that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur with respect to inclusion of bonus to contract price due to bad weather conditions ‘and limited experience with similar types of contracts. As of December 31, 2030, the construction incurred to date is P2,400,000. on February 1, 2031, DJ and the customers agree to modify the contract by changing the design of the building. As a result, the contract price and total tstimated cost increased by P1,600,000 and P1,000,000, respectively. On this fate, the remaining work to be performed which is primarily inside the building and not subject to weather conditions, DJ now expects that it is highly probable that it can finish the building on time for it to be entitled to the bonus. Despite the changes, DJ concludes that the remaining goods and services to be provided using the modified contract are not distinct from the goods and Porvices transferred on or before the date of contract modification; that is, the contract remains a single performance obligation. For the year ended December 31, 2031, DJ incurred construction cost of P3,000,000. Req, 1. How much is construction in progress as of year 2031? a. P8,760,000 c. P5,400,000 b. P5,160,000 d. P2,160,000 : . Req. 2. Which of the following statement is incorrect? a. The total realized gross profit in year 2030 is P1,200,000 b. The total construction in progress in year 2030 is P3,600,000. c. The total contract price inl year 2031 is P13,600,000. d. The construction revenue to be credited in year 2031 is P5,160,000. Answer 1) A 2) C Suggested Solution: Req. 1 & 2 2030 To date Prior Year Current Contract Price (12,000,000 x 30%) 3,600,000 ‘ 3,600,000 Total Estimated Costs (8,000,000 x 30%) _ 2,400,000 : 2,400,000 Estimated Gross Profit (4,000,000 x 30%) ~ 1,200,000 % 1,200,000 2031 Todate Prior Year Current Contract Price (14,600,000 x 60%) 8,760,000 3,600,000 _ 5,160,000 Total Estimated Costs (9,000,000 x 60%) 5,400,000 __ 2,400,000 _3,000,000 Estimated Gross Profit (5,600,000 x 60%) 1,200,000 2,160,000 4M | 8M = 30% .4M 9M = 60% Contract Price 2031 is P14,600,000 = (12M + bonus 1M + 1.6M)Long Term Construction Contracts 172 Cost incurred to date Prior year 2,400,000 Current year 3,000,000 Realized gross profit to date 3,360,000 Total CIP - 2031 8,760,000 Problem 5: XY Constructions began construction work under a three year contract. The contract price was P700,000. XY uses the percentage of completion method for financial accounting purposes. The financial statement presentation relating to this contract at December 31, 2030 is presented below: Balance sheet Accounts Receivable - construction billings 26,250 Construction in progress 87,500 82,250 5,250 Less: Contract billings Income Statement = Income (before tax) on the contract recognized in 2030 17,500 The total estimated cost is: a. P140,000 c. P656,250 b. P560,000 d. P700,000 Answer: B Suggested Solution: cIP 87,500 Divide: Contract price 700,000 % of completion 12.5% Cost incurred to date (CIP 87,500 - RGP 17,500) 70,000 Divide by: % 12.5% ‘ 560,000 Total cost Problem 6: Lim Construction was recently awarded a P6,730,000 contract-to construct a trade center for Ayala Inc. Lim Construction estimates it will take 46 months to complete the contract. The company uses the percentage of completion method to estimate profits. The following information details the actual and estimated costs for the year 2027-2030:Hong Term Constracton Coetracts 173 Year Actual Cost Each Year Estimated Cost to Complete 2027 3,120,000 3,264,000 2028 1,584,000 i 1,800,000 3029 1,152,000 912,000 2030 1,080,000 : How much is the balance of Construction in Progress account as of 2029? pow 5,818,000 c. P5,856,000 b. P3,808,000 d. P5,800,000 Answer A Suggested Solution: Cost incurred to date 2017 3,120,000 2018 1,584,000 2019 1,152,000 Realized loss to date - Year 2029(6,730,000 - 6,768,000) (38,000) Total CIP - 2029 5,818,000 Problem 7: Macapinlac, Inc. works on a P10,500,000 contract in 2023 to construct an office building. During 2023, Macapinlac, Inc. uses the cost to cost method. At December 31, 2023, the balances in certain accounts were: Construction in progress — P3,780,000 ; accounts receivable - 360,000 ; and billings on construction in process P1,800,000 ; contract retention ~ P180,000 ; mobilization fee — P140,000. At December 31, 2023, the estimated cost at completion is P7,350,000. The realized gross profit in 2023. a. P1,102,500 c. P1,242,500 b. P1,062,500 d. P1,134,000 Answer D Suggested Solution: Contract Price 10,500,000 less: Total Estimated costs 7,350,000 Estimated Gross Profit 3,150,000 x% of completion (3,780,000 / 10,500,000) 36% Realized gross profit 2023 1,134,000 Problem 8: On January 1, 2026, AVIDA was contracted to construct a townhouse for SM Corp. for a total contract price of P50,400,000. The building was completed by November 31, 2028. The following are the data of AVIDA:Long Term Construction Qsubracts 114 2026 2027 2028 Contract cost incurred during the year 19,200,000 - 15,600,000 8,700,000 Estimated cost at completion 38,400,000 43,500,000 43,500,000 Billing during the year = 19,200,000 21,000,000 10,200,000 Req. 1: The entry to record the recognized profit in 2028 includes credit to: ¢. Contract revenue P10,080,000 a. CIP P1,380,000 b. CIP P50,400,000 d. Contract cost P8,700,000 Req. 2: How much is the total Construction in Progress at December 31, 2027? ¢. P21,120,000 a. P34,800,000 b. P40,320,000 d. P46,320,000 Answer 1) C 2)B Suggested Solution: Req. 1 2027 To Date Contract Price (50,400,000 x 80% ) 40,320,000 Total Estimated Costs (43,500,000 x 80%) _ 34,800,000 Estimated Gross Profit (6,900,000 x 80%) ~ 5,520,000 To Date Prior Year Current 50,400,000 40,320,000 10,080,000 43,500,000 34,800,000 _ 8,700,000 2028 Contract Price (50,400,000 x 100% ) Total Estimated Costs (43,500,000 x 100%) Estimated Gross Profit (6,900,000 x 100%) 6,900,000 5,520,000 1,380,000 Journal entry CIP 1,380,000 Construction Costs 8,700,000 Construction Revenue 10,080,000 Req. 2 Cost Incurred to Date 2027 Prior Year 19,200,000 Current Year 15,600,000 Realized Gross Profit to date 2027 5,520,000 Total Construction in Progress 2027 40,320,000 Problem 9: TUV Construction Company started work on three job sites during the current year. Any costs incurred are expected to be recoverable. Data relating to the three jobs are given below:Long Term Construction Qoatracts 175 Estimated Billings | Collection Contract | Cost Cost to On On Site Price___| Incurred | Complete | Contract | Contract Luzon 875,000 | 656,250 875,000 | 875,000 ‘Visayas 1,225,000 | 175,000 700,000 175,000 175,000 Mindanao 437,500 | 175,000 175,000 262,500 175,000 What would be the amount of Construction in Progress, net of progress billings, to be reported on the year-end balance sheet using the Percentage of Completion Zero Profit /Hybrid a. P26,250 due from _ P87,500 current asset b. _ P26,250 current liability P87,500 current asset c P26,250 due to r P87,500 due from d. _ P26,250 current asset P87,500 current liability Answer D Suggested Solution: Percentage of Completion Method Estimated % of Cost Gross Profit Completion PP incurred OP Luzon 218,750 100% 218,750 656,250 875,000 Visayas 350,000 20% 70,000 175,000 245,000 Mindanao 87,500 50% 43,750 175,000 _218,750 1,338,750 Zero Profit Method Estimated % of Cost Gross Profit Completion GP incurred OP Luzon 218,750 100% 218,750 656,250 _ 875,000 Visayas 350,000 20% 0 175,000 175,000 Mindanao 87,500 50% 0 175,000 __175,000 1,225,000 =1:225,000, ; % of Completion Zero Profit cp y 1,338,750 1,225,000 PB 1,312,500___ 1,312,500 Current Assets (Current Liability) 26,250 87,500) Problem 10: On January 1, 2028, Ladines Construction Corp. began constructing a P2,100,000 contract. The following are relevant informationsLong Tern Construction Contracts 176 provided by the corporation: Ladines uses percentage of completion method, For the year ended December 31, 2029, Ladines Construction billed its client an additional 55% of the contract price. 2028 2029 2030 ‘Construction in Progress P441,000 2 ? Estimated costs to complete ? 2 3 ‘Costs Incurred P425,250 | P969,000 | P 675,750 Excess of Construction in| P84,000 | P330,750 a Progress over Billings current current liability liability Required: Compute for the following: Req. 1. How much is the realized gross profit (loss) in 20297 a. P(45,000) cc. P(60,750) b. P15,750 d. P30,000 Req. 2. How much is the balance of construction in progress in 2029? a. P1,680,000 c. P1,349,250 d. P1,365,000 b. P2,010,750 Req. 3. How much is the estimated remaining cost in 2028? a. P1,599,750 c. P1,680,000 b. P1,155,000 d. P1,584,000 Answer 1) C 2)C3)A Suggested Solution: Req. 1 & 2 cp Progress Billings cI 425,250 RGP Y_ 15,750 RL 525,000 2028 441,000 525,000 2028 cr 969,000 | 60,750 RL 1,155,000 (55% x 2,100,000) RGP 2029 | 1,349,250 1,680,000 2029 cl 675,750 RL 420,000 RGP | 75,000 2030 2,100,000 2,100,000 Total Construction in progréss in 2029 is 1,349,250 = PB 1,680,000 - Contract Liability 330,750.Long Term Construction Coatracts 177 Total progress billing in 2028 is 525,000 = CIP 441,000 + Contract Liability 84,000. Req. 3 2028 s : Construction Revenue to date 441,000 Less: Realized gross profit to date 15,750 Costs incurred to date 425,250 Divide by % of completion (441,000/ 2,100,000) 21% Total Estimated costs 2,025,000 Less: Cost incurred to date 425,250 Estimated cost to complete 1,599,750 Problem 11: Sweet Builders Corporation entered in a long term project in 2027 and continued through 2028. Sweet Builders Corp. presently has available dependable and reliable estimates. As of 2028, Sweet Builders billed 2/5 of the total contract price. Some other information about the project were as follows: 2027 2028 Construction cost to date P148,750 |_P420,000 Excess of Construction in Progress over 38,750 | (61,250) Billings - due from: / (due to) Contract billings 145,000 612,500, Collections from the contract 135,000 437,500 Compute the percentage of completion rate as of 2028: a, 28% c. 36% b. 25% d. 44% Answer C. Suggested Solution: Contract Billing 612,500 Due to (61,250, CIP 2028 551,250 CIP 2028 551,250 Divide by Contract Price (612,500 + 2/5 billing) 1,531,250 Percentage of completion 36% Problem 12: On August 1, 2026. Love Construction Corp. began constructing a P1,750,000 contract. As of year-end, the following are relevant information Provided by the corp.:Long Ferm Construction Contracts 178 i" 2026 2027 2028 Construction in Progress 367,500 | 1,124,375 2 Estimated costs to complete _| 1,333,125 | 625,625 = Costs Incurred 354,375 | 807,500 | 563,125 (1) RGP in 2027 using the percentage of completion method (2) RGP in 2028 using zero profit method? a. P (24,375), P48,625 b. P (50,625), P62,500 Answer B Suggested Solution: Percentage of completion cIP cr 354,375 Sioee RGP 13,125 2026 367,500 cI 807,500 RGP 2027 1,124,375, Zero Profit Method CIP. 2027 y 1,124,375 cI 563,125 RGP 62,500 2028 1,750,000 Problem 13: Vermosa Co. entered into a long term construction contract for 3 years. The company estimated the cost of the construction for 3 years amounted to P9,600,000. The company billed its clients at 125% of the estimated cost for 3 years. The outcome of the contract was not estimated c. P (37,500), P62,500 d. P (50,625), 0 50,625 reliably. 2027 2028 2029 Costs incurred P2,350,000 | P7,796,000 | P1,694,000 Estimated costs to complete 7,050,000 | 3,382,000 2 Billings to customer (based on contract price) 28% | 42% 2Lang Team Crasteaction Contracts 179 Req. 1: The total contract price in year 2027 is: ‘a. P9,600,000 c. P6,720,000 b. P12,000,000 d. P11,840,000 Req. 2: What is the construction-in-progress, net of progress billings / progress billings, net of construction-in-progress as of 2028? a. P3,426,000 ©. P(604,000) b. P1,746,000 d. P218,000 Answer 1) B 2) D Suggested Solution: Req. 1 Total estimated cost of construction 9,600,000 Total billings at completion 125% Contract Price 12,000,000 Req. 2 Cost incurred -2027 2,350,000 Cost incurred -2028 7,796,000 Total Cost incurred to date - 2028 10,146,000 Add: Realized loss to date 1,528,000) Total CIP - 2028 8,618,000 less: Progress Billings - 2028 (70% x 12,000,000) __ 8,400,000 Total CIP net of Progress Billings - 2028 2028 Contract Price (125% x 9,600,000) 12,000,000 Total estimated costs to complete Cost Incurred to date - 2028 10,146,000 Estimated cost to complete 3,382,000 _ 13,528,000 Estimated Loss (1,528,000) x 100% Realized Loss to date - 2028 (1,528,000) Problem 14: DMCI entered into a fixed price contract for the construction of a toad for Camella Corp. DMCI determines the stage of completion of construction contracts using the percentage of completion “cost to cost nethod”, The total estimated cost to complete the contract is P75 million. The following were the total actual costs incurred by DMCI during the first year ofthe construction:Long Teun Construction Couracts 18) Research and development costs for which reimbursement is not specified in the contract b. 1,000,000 Cost of negotiating the contract (charge immediately as expense) 500,000 c. Marketing costs 150,000 d. Costs of hiring equipment 700,000 e. Costs of materials purchased but not yet used in construction 2,500,000 f. Costs of materials used in construction . 15,000,000 g. Costs of moving plant, equipment and materials to and from the contract site 200,000 h. Administrative costs not expected to be reimbursed: 100,000 i. Depreciation of equipment used in construction 600,000 j. Depreciation of idle construction equipment 300,000 _ Site labor costs 5,000,000 |, Site supervision costs - 1,000,000 Req. 1: How much is the cost incurred to date? a. 25,800,000 : c. P25,300,000 b. P22,500,000 d. P22,300,000 Req. 2: What is the percentage of completion of the contract at the end of first ear? : yee" 30% ©. 25% pb. 30.40% d. 34.73% Answer 1) B 2) A suggested Solution: eq. 1 : i vSoats of hiring equipment : Costs of materials used in construction Costs of moving plant, equipment and materials to and from the contract site Depreciation of equipment used in construction Site labor costs site supervision costs ‘Total Cost Incurred to Date Red? Oost Incurred to Date = 22,500,000 otal Estimated Cost to Complete 75,000,000 700,000 15,000,000 200,000 600,000 5,000,000 1,000,000 72,500,000. 22,500,000. 30% Bago es eZLong Term Construction Contracts 181 Problem 15: Chen Corp. uses the cost to cost method to account for its construction contracts. The contract price of the project is P1,800,000. Chen Corp, estimates that it will take 36 months to complete the contract. The following information for its construction contract is presented below: 2021 20222023 Cost Incurred to date 400,000 | 1,260,000 |"? Realized Gross Profit for the current year _| 50,000 | 310,000 | 80,000 Req. 1: What is the percentage of completion rate in year 2021? a. 20% c. 25% b. 32% d. 30% Req. 2: What is the total estimated cost to complete in 2023? a. P140,000 c. P1,400,000 b. P1,360,000 d. P1,660,000 Req. 3: What is the percentage of completion rate in year 2022? a. 90% c. 60% b. 85% d. 80% Req. 4: What is the estimated cost to complete in year 2021? a. 1,600,000 c. P1,350,000 b. 1,750,000 d. P1,200,000 Answer 1) C 2) B 3) A 4)D Suggested Solution: Req. 1 2021 Realized Gross Profit - CY 50,000 Realized Gross Profit - PY : Realized Gross Profit - To date 50,000 Cost Incurred to Date 400,000 Contract Revenue to Date 450,000 Divide by Contract Price. 1,800,000 Percentage of Completion rate 25% Req. 2 2023 Realized Gross Profit - CY 80,000 Realized Gross Profit - PY 360,000 Realized Gross Profit - To date 440,000 Divide by % of completion 100% Estimated Gross Profit 440,000 Contract Price 1,800,000 Total Estimated Cost to complete 1,360,0002 Long Term Construction 0, a ra 3. 2022 ‘ealized Gross Profit - Realized Gross Profit - ey See Realized Gross Profit - To Di Soe ‘0 Date 360,000 Cost Incurred to Date 1,260,000. Contract Revenue to Date ~1,620,000— Divide by Contract Price 1,800,000 Percentage of Completion rate 90% Req. 4 2021 Cost Incurred to Date * 400,000 Divide by % of completion 25% Total Estimated Cost to Complete 1,600,000 Less: Cost Incurred to Date ___400,000_ Estimated Costs to Complete :200,000~ Problem 16: Ayala Co. entered into a long term construction contract for 3 years. Contract price agreed was P4,150,000. The outcome of the contract was, ‘estimated reliably. The following data were ascertained for the contract: 2017 2018 30% 82.5% Percentage of completion 1,960,000 — P840,000 Estimated costs to complete Reg. 1. What is the total cost incurred in year 2018? a. P4,073,750 ©. P1,680,000 b. P840,000 5 d. P3,120,000 Req. 2. The realized gross profit (loss) in year 2018 is: a. P650,000 ‘c. P(245,000) b. P405,000 d. P(1,055,000) Req. 3. What is the construction cost of sales for the year 2016? a. P3,960,000 c. 3,233,750 b. P3,120,000 d, P4,478,750 is ion-in-progress as of 2018? Req. 4. What is the construction-in-progress Xo £1, b. 73'310,000 d. P2,470,000 Answer: 1) D 2) D 3) C 4) B fog etLong Team Canstraction Coatacts 183 1 ~2017 c ee saourred 7 Cost Incurred To date os - otal Estimated Cost to Complete x30) conta a so" (x + 1,960,000) past 588,000 = * 3 - 588,000 ee 70% 7 " - 2018 cost soured * 2° t Incurred To date 92.5%" —qotal Estimated Cost to Complete 840,000 + x *.——"n,aAl 2.5% (640,000 + x + 840,000) 1,386,000 + 32.5%x =840,000 + x 2 546,000 _MIS#X= Te 17.5% 17.5% x=: 3,120,000 ad 2017 Contract Price 4,150,000 Total estimated costs to complete é Cost Incurred to date - 2017 840,000 Estimated cost to complete - 2017 _ 1,960,000 __2,800,000 Estimated Loss 1,350,000 x 30% Realized Gross Profit to date - 2017 405,000 2018 Contract Price 4,150,000 Total estimated costs to complete Cost Incurred to date (3,120,000 + 840,000) 3,960,000 Estimated cost to complete - 2018 840,000 _4,800,000_ Estimated Loss (650,000) bi 100% a Loss to date - 2018 (650,000) ie RGP to date - 2017 405,000 ‘lized Loss current year - 2018 1,055,000)Long Term Constraction Contracts 184 Req. 3 Prior Current Year 2017 _ To date Year Year Contract Price (4,150,000 x 30%) 1,245,000 - —‘1,245,000 Total Estimated Costs to Complete (2,800,000 x 30%) 840,000 - 840,000 Estimated Gross Profit (1,350,000 x 30%) 405,000 0 405,000 Current .Todate Prior Year Year Year 2018 Contract Price (4,150,000 x 82.5%) 3,423,750 1,245,000 _—2,178,750 Total Estimated Costs to Complete _4,073,750* __ 840,000 __3,233,750 Estimated Loss (650,000 x 100%) (650,000) __ 405,000 __(1,055,000) “Adjust for the recognition of loss Req. 4 Cost incurred to date - 2018 (840,000 + 3,120,000) 3,960,000 Add: Realized loss to date -2018 (650,000) 3,310,000 Total CIP - 2018 Problem 16: Santiago Builders began contrition work in 2030 for a project with price of P24,000,000. Santiago Builders uses percentage of contract completion. The financial statements for 2030 relating to the contract show the following: ‘Accounts Receivable 1,500,000 Construction in Progress 4,800,000 Contract Billings to date 4,500,000 Realized Gross in 2030 600,000 Compute the total cost incurred to date and cash collection for the year 2030: Cost Incurred to Date Cash Collection a. 4,200,000 P3,000,000 b. 4,800,000 P4,200,000 c. P4,800,000 P3,000,000 d. P4,200,000 P22,500,000Long Term Canstetion Oretracty 185 Answer A suggested Solution: Construction in Progress Cost Incurred 4,200,000 Realized Gross Profit 600,000 Realized Loss 4,300,000 Accounts Receivable Contract Billings 4,500,000 | 3,000,000 Collection 1,500,000 Problem 17: On January 2, 2030, DMCI Corp. contracted to building an office building for Robinson Corp. for a total contract price of P11,800,000. Estimated total contract costs are P10,400,000. Cost incurred to date related to the project are as follows: a. Cost of direct materials used 800,000 b. Cost of direct labor, including supervision of P200,000 600,000 c. Cost of indirect materials used 220,000 d. Cost incurred in obtaining the contract previously written off 280,000 e. Depreciation of equipment used on the project 480,000 f, Payroll of design and technical department allocated to the contract 320,000 g. Insurance cost (1/3 for the project) 720,000 h. Costs of contracted research and development 420,000 i, Depreciation of idle equipment not used on a particular contract 240,000 j. Selling costs 180,000 k. General and Administrative expenses specifically included under the term of the contract 120,000 |. Borrowing cost incurred during the construction period 520,000 m. Advances made to subcontractors 400,000, Total 5, 100. Using the cost to cost method, what is the realized gross profit to be recognized in year 2030? : a P538,440 c. P500,780 b. P417,340 d. P444,220Answer C Suggested Solution: Contract Price ‘Total Estimated cost to complete Cost incurred prior years Cost incurred current year Cost incurred to date Estimated cost to complete Estimated Gross Profit x % of completion RGP to date RGP prior year RGP current year 3. Long Ferm Construction Contacts 186 11,800,000 A —3:720,000__ 720,000 6,680,000 10,400,000 1,400,000 35.77% 500,780 The total cost incurred to date in year 2030: Cost of direct materials used Cost of direct labor, including supervision of P200,000 Cost of indirect materials used Depreciation of equipment used on the project Payroll of design and technical department allocated to the contract Insurance cost (1/3 for the project) Costs of contracted research and development General and Administrative expenses specifically included under the term of the contract Borrowing cost incurred during the construction period ___500,780_ 800,000 600,000 220,000 480,000 320,000 240,000 420,000 120,000 520,000 ‘3,720,000 % of completion = 3,720,000 / 10,400,000 = 35.77% Problem 18: On April 1, 2022, PROFRIENDS obtained a contract to construct a building. The building was estimated to be built at a total cost of P17,500,000, but that amount will be reduced depending on when construction of building is completed and is scheduled for completion on October 2024. The contract contains a penalty clause to the effect that the other party was to deduct P35,000 from the contract price for each week of delay. On December 31, 2022 and 2023, PROFRIENDS cannot predict the variable consideration regarding the completion of the project on time because of the different outcomes possible based on the company’s construction schedule and its experiences with past projects. aLong Term Coustraction (retracts 187 on year 2024, Due to bad weather conditions, PROFREINDS does not expect that it can finish the building on time. The completion of the project was delayed for 5 weeks. Below are the following data pertaining to the construction periods. 2022 2023 2024 Cost incurred 1,750,000 | 6,440,000 1,085,000. Estimated cost to complete_| 7,000,000 910,000 0 Progress billings 1,400,000 | 15,225,000 4,200,000, Req, 1. The estimated gross profit in year 2023 is: a. P11,900,000 c. P11,725,000 b. P8,400,000 d. P10,150,000 Req, 2. Using the percentage of completion method, what is the realized gross profit (loss) for the year 2024? a. P (35,000) c. P822,500 b. P (122,500) d. P840,000 ‘Answer: 1) A 2) D Suggested Solution: Req. 1 & 2 Progress Billings - 2022 1,400,000 Progress Billings - 2023 15,225,000 Progress Billings - 2024 4,200,000 Total Contract Price as of 2024 20,825,000 Add: Penalty/Claims (5 weeks x 35,000) 175,000 Total Contract Price as of 2023 21,000,000 2023 Contract Price 21,000,000 Total Estimated Cost to Complete (8,190,000 + 910,000) 9,100,000 Estimated Gross Profit 11,900,000 x% of completion (8,190,000 / 9,100,000) 90% Realized Gross Profit to Date - 2023 10,710,000 2024 Contract Price 20,825,000 Total Estimated Cost to Complete (9,275,000 + 0) 9,275,000 Estimated Gross Profit 11,550,000 x% of completion 100% Realized Gross Profit to Date - 2024 11,550,000 Realized Gross Profit to Date - Prior Years 10,710,000 Realized Gross Profit - Current Year 2024Long Term Construction Contracts 183 Problem 19: MC Builders recognize construction revenue and costs using the percentage of completion method. During 2030, a single long term project begun which continued through 2031. Information on the project shows: 2030 2031 Contract Billings on Contract 600,000 2,520,000 Accounts Receivable 600,000 1,800,000 Construction costs 630,000 1,152,000 Construction in progress 732,000 2,184,000 What is the realized gross profit from this long term contract? 2030 2031 a. P102,000 P300,000 b. 102,000 P768,000 c. P132,000 P600,000 d. P132,000 P1,368,000 Answer A Suggested Solution: Construction in Progress Cost Incurred 630,000 Realized Gross Profit 4 102,000 realized Loss Year 2030 732,000 Cost Incurred ¥ 1,152,000 realized Loss Realized Gross Profit, 300,000 Year 2031 2,184,000 Problem 20: On January 1, 2030, RSN Construction Corp. began constructing a P100,000,000 contract. Ladines uses percentage of completion method. The following were the actual costs incurred during 2030: a) Administrative costs not expected to be reimbursed 150,000 b) Administrative costs expected to be reimbursed in accordance with contractual agreement 800,000 ©) Cost of moving plant, equipment and materials to and from the contract site 100,000 d) Costs of materials but not yet used in the construction 1,000,000 e) Construction overhead 3,200,000 f) Depreciation of idle construction equipment 2,000,000 g) Costs of construction labor 7,500,000 h) Costs of design and technical assistance that are not directly related to a specific contract (properly allocated) 250,000 i) Costs of design and technical assistance that are directly related to the contract 500,000Long Tem Coston Cnet 189 j) Depreciation of property used in the contract k) Costs of materials used in the construction 25 an 000 1) Insurance costs during construction Bee m) Marketing costs wean n) Research and Development cost for which reimbursement "000.000 is not specified in the contract 9,000 0 Total costs incurred to date 51.250,005 21,250,000" How much is the total cost incurred to date during 2020: a. P25,000,000 c. P41,100,000 b. P38,100,000 . P39,100,000 Answer B Suggested Solution: ‘a. Administrative costs expected to be reimbursed in accordance with contractual agreement 800,000 b. Cost of moving plant, equipment and materials to and from the contract site 100,000 c. Construction overhead 3,200,000 d. Costs of construction labor 7'500,000 e. Costs of design anid technical assistance that are not directly related to a specific contract (properly allocated) 250,000 f. Costs of design and technical assistance that are directly related to the contract 500,000 g. Depreciation of property used in the contract 500,000 h. Costs of materials used in the construction 25,000,000 i. Insurance costs during construction 250,000 Total costs incurred to date 38,100,000 Eee Problem 21: Paul Constructions has entered into a contract beginning January 1, 2020, to build a pool. It has been estimated that the pool will cost P300,000, and will take three years to construct. The pool will be billed to the client at P450,000. The following data pertain to the construction period. 2020 2021 | 2022 Cost to date 135,000 | 210,000 _| 300,000 Estimated cost to complete 165,000 90,000 0 Progress billing to date 135,000 275,000 | 450,000 Cash collected to date 120,000 | 250,000 | 450,000 During 2020, Costs incurred include P15,000 standard materials stored at the site to be used in 2022 to complete the project.Long Term Constrisetion Contracts 19) Using the percentage of completion method, compute the realized gross profit for 2022: a. P52,500 c. P97,500 b. P45,000 d. P150,000 Answer: A Suggested Solution: 2021 450,000 Contract Price Total Estimated Cost to Complete (195,000 + 105,000) __ 300,000 Estimated Gross Profit 150,000 x % of completion (195K / 300K) 65% Realized Gross Profit to Date - 2021 97,500 2022 Contract Price 450,000 Total Estimated Cost to Complete (300,000 + 0) 300,000 Estimated Gross Profit 150,000 x % of completion (300K / 300 K) 100% Realized Gross Profit to Date - 2022 150,000 Realized Gross Profit to Date - Prior Years 97,500 Realized Gross Profit - Current Year 2022 52,500 Problem 22: In 2030 Villar Co. was contracted to do a 10-storey building for P120 million. The project was estimated to be completed in two years. ‘The construction contract provided among other things the following: Ten per cent mobilization fee (to be deducted from the last billing) payable within fifteen days after the signing of the contract; Retention provision of 10% on all billings, payable with the final billing, after the completion and acceptance of the completed project; and Progress billings on construction are payable within fifteen days from acceptance. Villar estimated its gross margin on the project at 25%. It used the percentage of completion method of accounting. By the end of the year, Villar presented one progress billings corresponding to 10% completion which was evaluated and accepted by Camella on December 29, 2030 for payment in January of next year. In 2030, assuming the use ofLong Term Constraction Cretracts 19} percentage of completion method of accounting, Villar received cash as total fee of? a. P1,200,000 c. P12,000,000 b. P11,880,000 . d. P13,200,000 Answer: C Suggested Solution: 10% mobilization fee x P120 million = P12 million Problem 23: On January 2, 2030, Manuela Corp. enters into a construction contact with Mr. Manny. The performance obligation in the contract will be satisfied overtime. Manuela uses a percentage of completion “cost to cost method” in measuring progress of the construction. The total estimated cost to complete is P25,000,000. In 2030, Manuela incurred a total cost of P9,500,000, which includes P1,000,000 advance payment to subcontractor. However, the subcontracted work ‘has not yet been started. Also P500,000 cost of materials not yet used in the construction. What is the percentage of completion rate? a. 30% c. 38% b. 32% d, 24% Answer B Suggested Solution: Cost Incurred 9,500,000 Advance payment to contractor (1,000,000) Cost of materials not yet installed (500,000 Cost Incurred to date 8,000,000 Divide by Total estimated cost to complete 25,000,000 Percentage of completion rate % Problem 24: Komatsu Corp. works on a long term construction project in 2022. The total contract price is P50,000,000. The contractual arrangement stipulates that if the cumulative inflation rate exceeds 20%, the total contract price shall be adjusted by 15%. Additional information on the contract is shown below: 2022 2023 Cumulative Inflation Rate 15% 30% Estimated Cost to complete 18,000,000 7,500,000 Cost incurred to Date 12,000,000 22,500,000™ Long Term Crestractiog : “# Igy What is the realized gross profit in December 31, 2023? a. P8,000,000 c. P9,625,000 b. P12,625,000 d. P7,000,000 Answer B Suggested Solution: Contract Price 50,000,000 Total Estimated cost to complete Cost incurred prior years 3 Cost incurred current year _ 12,000,000 Cost incurred to date 12,000,000 Estimated cost to complete _ 18,000,000 30,000,000 Estimated Gross Profit 20,000,000 x % of completion TAO I. RGP to date - 2022 8,000,000— Contract Price (50,000,000 x 115%) 57,500,000 Total Estimated cost to complete Cost incurred prior years 12,000,000 Cost incurred current year 10,500,000 Cost incurred to date 22,500,000 Estimated cost to complete 7,500,000 __ 30,000,000 Estimated Gross Profit 27,500,000 x % of completion 75% RGP to date 20,625,000 RGP prior year (8,000,000) RGP current year - 2023 12,625,000 Problem 25: In 2030, PBC Corp. was contracted to build PIPE for P150 milion ‘The project to be completed in two years and the contract provided for: - 10% mobilization fee (to be deducted 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. PBC uses a percentage of completion the percentage of completion method of accounting, estimated a 25% gross margin on the project. By the end of 2030, PBC had presented progress billings corresponding to 50% completion. All of the progress billing presented in 2030 were accepted, except the last one for 10% which was accepted on January 5, 2031. With the exception of one bill fooug Term Coustuction Coaracts 193 8% which was due on January 7, 2031 alll of the billings accepted in 2030 were settled. Payments made by PIPE in 2030 amounted to: a. P33,800,000 c. P82,500,000 b. P58,200,000 d. P59,000,000 Answer B Suggested Solution: 150 m x 10% = 15m + (32% x 150mx 90%) = 58,200,000 Problem 26: SMDC entered into a fixed price contract for the construction of a condominium for Mr. Sy on January 2, 2030. SMDC determines the stage of completion of construction contracts using the percentage of completion ‘cost to cost method”. The estimated total costs of the contracts are as follows: a. Estimated administrative costs expected to be reimbursed in accordance with the contractual agreement 500,000 b. Estimated construction overheads 5,200,000 c. Estimated costs of construction labor nf 15,000,000 d. Estimated costs of design and technical assistance that are not directly related to a specific contract (properly allocated) 250,000 Estimated administration costs for which reimbursement is not specified in the contract 5,000,000 f. Estimated costs of design and technical assistance that are directly related to the contract 600,000 g. Estimated costs of wasted materials, labor or other resources that were not reflected in the price of the contract 500,000 h. Estimated costs of materials to be used in the construction 30,000,000 i. Estimated costs of rectification and guarantee work including expected warranty costs 2,500,000 j. Estimated insurance costs during the construction 500,000 k. Estimated marketing costs for selling condominium units Estimated Total Contract Costs How much is the total estimated cost to complete the project? a. P54,550,000 c. P52,550,000 b. P52,300,000 d. 55,050,000 Answer ALong Term Construction Contracts 194 Suggested Solution: Estimated administrative costs expected to be reimbursed in accordance with the contractual agreement 500,000 b. Estimated construction overheads 5,200,000 c. Estimated costs of construction labor 15,000,000 d. Estimated costs of design and technical assistance that are not directly related to a specific contract (properly allocated) 250,000 e. Estimated costs of design and technical assistance that are directly related to the contract 600,000 {, Estimated costs of materials to be used in the construction 30,000,000 g. Estimated costs of rectification and guarantee work including expected warranty costs 2,500,000 h. Estimated insurance costs during the construction ~ 500,000 Estimated Total Contract Costs a Problem 27: Ginebra Corp recognizes construction revenue and cost using the percentage of completion method. During 2020, a single long term project was begun which continued through 2021. Information on the project follows: 2020 2021 Partial Billing on Contracts 1,000,000 4,200,000 Accounts Receivable 1,000,000 3,000,000 Construction costs 1,050,000 —_1,920,000 Construction in Progress 1,220,000 3,640,000 What is the gross profit recognized from this long term construction contract in year 2020 and 2021, respectively? ‘a, P220,000 and P2,280,000 ‘ ¢, P220,000 and P1,000,000 b. P170,000 and P500,000 d. P170,000 and P1,280,000 Answer B Suggested Solution: CIP Cost Incurred 1,050,000 Realized Gross Profit 170,000 Realized Loss Total 1,220,000 [| Cost Incurred 1,920,000 Realized Loss Realized Gross Profit 500,000 Total + 3,640,000]Aeag Term Coestacton Coatacts 195 problem 28: During 2030, Rodriguez Inc. started work on a P3,000,000 fixed price contract. Any costs incurred are expected to be recoverable, The accounting records disclosed the following data for the year ended December 31, 2030: Cost incurred 930,000 Estimated Cost to Complete 2,170,000 Progress Billings 1,100,000 Collections 700,000 How much loss should Rodriguez Inc. have recognized in 2030? Percentage of Completion Zero Profit a 100,000 - b & o. 100,000 100,000 a. 30,000 - Answer C Suggested Solution: Contract Price 3,000,000 Less Total Cost Cost Incurred Current year 930,000 Cost Incurred Current prior year Total Cost Incurred to date 930,000 Add: Estimated Cost to Complete 2,170,000 _ 3,100,000 Estimated Gross Loss (100,000) Note: When it is probable that the contract costs will exceed the total contract revenues. The expected loss shall be recognized immediately as expense in full amount in both percentage of completion and zero profit method. 1 Problem 29: Cheng Corp has used the cost to cost method of computing the percentage of completion to recognize revenue. Total contract price was P2,000,000. The project will take three years to complete. The following data are available from 2021 to 2023: 2021 2022 2023 Realized gross profit (loss), current year 40,000 140,000 (20,000) Cost incurred each year 360,000 =? —-820,000 How much is the total estimated gross profit on the project by the end of 2022?Long Term Construction Contacts 196 a. P233,333.40 c. P450,000 a b. P350,000 d. P300,000 Answer D - Suggested Solution: 2021 Construction Revenue (2 million x 20%) Cost of Construction (1,800,000 x 20%) Estimated Gross Profit 2022 Construction Revenue (2 million x 60%) 1,200,000 400,000 800,000 Cost of Construction Estimated Gross Profit (300,000 x 60%) 2023 To date Years Year Construction Revenue (2 million x 100%) __2:000,000°*" 1,200,000 800,000 Cost of Construction (1,840,000 x 100%) 1,840,000 _1,020,000 _820,000 Estimated Gross Profit 160,000 180,000 (20,000) % of completion 2021 = 400,000 contract revenue to date divide by contract price 2,000,000 = 20%. % of completion 2023 = 100% the year of completion. % of completion of 2020 = 1,200,000 contract revenue to date divide by contract price 2,000,000 = 60%. Realized Gross Profit to date 180,000 / 60% = 300,000 Estimated Gross Profit Problem 30: Mansfield Inc. has consistently used the percentage of completion method On January 1, 2030, it began constructing a work on a P6,000,000 project. At the inception date, the estimated cost of construction was 4,500,000. The following data relate to the progress of the contract: Income recognized at December 31, 2030 600,000 Cost incurred Jan. 1, 2031 through December 31, 2031 3,600,000 Estimated Cost to Complete at December 31, 2031 1,200,000 How much income should Mansfield Inc. recognize for the year ended December 31, 2031? a. P900,000 c. P600,000 b. P300,000 d. P525,000Long Term Construction Contracts 197 Answer B Suggested Solution: Contract Price 6,000,000 Less Total Cost Total Cost Incurred to date 3,600,000 Add: Estimated Cost to Complete _ 1,200,000 _ 4,800,000 Estimated Gross Loss 1,200,000 x% \ 75% Realized Gross Profit to date 900,000 Less: Realized Gross Profit prior year 600,000 Realized Gross Profit current year 300,000 Problem 31: On January 1, 2016 a contractor enters into a construction contract which includes a fixed contract price of P144,000 to build a bridge ‘The contract has a December 31 year-end. On December 31, 2016 the contractor's estimate of the total contract is still P96,000. However, by the end of 2017 the contractor’s estimate of contract cost increased to P120,000, excluding the variation below. In 2017 the customer and the contractor agree to a variation resulting in an increase in contract revenue of P2,400 and estimated additional contract costs of P1,800. Actual cumulative costs incurred to the end of 2016, 2017 and 2018 (the end of the contract) including the costs of the variation are P36,000, P85,260 and P120,600 respectively. At the end of 2016, 2017 and 2018 the customer paid the contractor progress billings of P60,000; P36,000 and P48,000 respectively. The contractor determines the stage of completion of the contract costs incurred for a work performed to date bear to the latest estimated total contract costs. Req. 1, Determine the profit (loss) for each year. 2016 2017 2018 a P18,000 P (780) P8,580 b P18,000 P17,220 P25,800 % — P18,900 P (1,680) P8,580 4 P18,000 P (2,460) P10,260 Req. 2. Using the same information above, compute “ the gross amount due from (to) customers for contract work:2016 2018 a. P(6,000) PO b. — P6,000 PO c. P60, 000 P8,580 d. — P54,000 P (2,460) P10,260 Answer 1) A 2) A Suggested Solution: Req. 1 2016 2017 -2018 7) Contract Price 144,000 144,000 | 144,003 ‘Add: Change Order/variation 2.400 2405 Contract Price 144,000 146,400 | 146,400) Costs incurred current year 36,000 49,260 350] ‘Add: Costs incurred prior years -0- 36,000 85,260 Costs incurred to date 36,000 85,260 | 120,600 ‘Add: Estimated costs to complete 60,000 36,540 O Total estimated costs ‘96,000 121,800 | 120,600 Estimated gross profit (loss) 48,000 24,600 25,800 Multiplied by: % of completion 37.50% 70% 100% Gross profit (loss) to date 18,000 17,220 25,800 Less: Gross profit in prior year -0- 18,000 17,220 Gross profit (loss) each year 18,000 (780) 8,580, 2016: P36,000/P96,000 =37.50% 2017: P85,260/121,800 = 70% Req. 2 2016 2017 [2018 | Total costs incurred to date 36,000 85,260 _| 120,600 ‘Add: Cumulative profits to date 18,000 17,220 | 25,800 Construction in progress to date 54,000 102,480 | 146,400 Less: Progress billings to date 60,000 96,000 _| 146,400 Gross amount due from (to) the customer | (6,000) 6,480 _| -0- 2017: P60,000 + P36,000 = P96,000 2018: P60,000 +P36,000 + P50,400 = P146,400 Problem 32: Albano Inc. has consistently used the percentage of completion method of recognizing income During 2030, Albano Inc. entered into a fxed price contract for P10,000,000. The following information available to the contact: Dec. 31, 2030 Dec. 31, 2031 Percentage of completion 20% 60% Estimated Cost at Completion 7,500,000 8,000,000 Income recognized to date 500,000 1/200,000Loeg Term Coestuction Cratacte 199 Contract cost incurred during 2031: a. P4,800,000 c. P3,300,000 b. 3,200,000 d. P3,500,000 ‘Answer: C Suggested Solution: Estimated Cost at Completion 7,500,000 x Percentage of Completion 20% Cost Incurred to Date - 2030 1,500,000 Less: Cost Incurred to Date - 2031 (8,000,000 x 60%) 4,800,000 Cost Incurred current year 2031 3,300,000 Problem 33: Bataan Construction Company recognized gross profit of P42,000 on its long-term project which has accumulated costs of P490,000. To finish the project, the company estimates that it has to incur additional cost of P735,000. “The contract price is: a. P798,000 c. P1,102,500 b, P1,330,000 d. P1,837,500 Answer B Suggested Solution: Total Contract Costs = P490,000 + P735,000 = P1,225,000 % of completion = 490,000/ 1,225,000 = 40% GP = 42,000/40% = P105,000 estimated gross profit Contract Price = P1,225,000 + P105,000 = P1,330,000 Problem 34: On January 2, 2020 Vista Corp enters into a contract with a customer for the construction of building. The contract price is P30,000,000. The parties also agreed that, when the building is complete, it will be inspected and assigned a green building certification level. If the building achieves the certification level specified in the contract, Vista will be entitled to an incentive payment of P2,500,000. Vista uses the percentage of completion method in measuring its progress on the contract. At contract inception, the entity cannot conclude that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur with respect to the inclusion of the incentive payment to contract price due to bad weather conditions, it does not expect that it can finish the building on time for it to be entitled to the incentive payments. The estimated costs to complete in year 2020 are P12,000,000. As of December 31, 2020, it incurs total costs of P6,750,000.Loag Term Canstruction Contracts 200 In 2021, it incurs total costs of P11,300,000. Due to good weather conditions, it now expects that it can finish the building on time for it to be entitled to the incentive payments. It expects that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The estimated costs to complete as of the end of 2020 are P950,000. Req, 1: What is the total realized gross profit in year 2020? a. PO ©. P3,375,000 b. P11,250,000 d. P4,050,000 Req. 2: What is the total realized gross profit in year 2021? a. P8,775,000 c. P12,825,000 b. P16,875,000 d. P13,500,000 Answer 1) D2) A Suggested Solution: Req. 1 ‘The incentive payment is not included in the contract price of year 2021 because it is only in year 2021 that it becomes highly probable. Contract Price 30,000,000 Total Estimated cost to complete Cost incurred prior years Cost incurred current year 6,750,000 Cost incurred to date 6,750,000 Estimated cost to complete 12,000,000 _18,750,000 Estimated Gross Profit 11,250,000 x % of completion (6.75 / 18.75) 36% RGP to date - 2020 4,050,000 Req. 2 Contract Price 32,500,000 Total Estimated cost to complete Cost incurred prior years 6,750,000 Cost incurred current year _ 11,300,000. Cost incurred to date 18,050,000 i Estimated cost to complete 950,000 _19,000,000 Estimated Gross Profit 13,500,000 x % of completion (18.05 / 19M) 95% RGP to date - 2021 12,825,000 RGP prior year 4,050,000. RGP current year - 2021 8,775,000 ee E000 eee Na Rie en Ei eaeLong Term Construction Crntracts 201 problem 35: Aquinde Inc. has consistently used the percentage of completion method of accounting for construction type contracts. During 2030, Aquinde started work on a P9,000,000 fixed price contract that was completed in 2031. Aquinde’s accounting record disclosed the following: Dec. 31, 2030 Dec. 31, 2031 6,300,000 Cumulative contract costs incurred 3,900,000 8,100,000 Estimated total costs at completion 7,800,000 How much income should Aquinde have recognized on this contract for the year ended December 31, 2031? a. P300,000 c. P700,000 b. P100,000 d. P600,000 Answer B Suggested Solution: 2030 2031 Contract Price 9,000,000 9,000,000 Less Total Cost 7,800,000 8,100,000 Estimated Gross Profit 1,200,000 900,000 x% of completion 39/78 63/81 RGP - to date 600,000 700,000 Less: RGP - prior year - 600,000 RGP - current year 600,000 100,000 Problem 36: Sugarfree has two construction jobs, which commenced during 2030: Project 1 Project 2 Contract Price P 2,100,000 P 750,000 Cost incurred during 2014 600,000 700,000 Estimated cost to complete 300,000 175,000 Contract billings during 2014 625,000 725,000 Collections 600,000 700,000 Expenses 50,000 25,000 Compute the net income (loss) that Sugarfree would report in its 2030 income statement. Zero-Profit Percentage of Completion a P(150,000) P750,000 b. P(150,000) P600,000 ¢ P(100,000) P675,000 4. P(200,000) P600,000Long Perm Construction Contracts 20) Answer D Suggested Solution: Pl P2 Contract Price 2,100,000 750,000 Total Cost (900,000) (875,000) Est GP 1,200,000 (125,000) x % of completion 67% 100% RGP (RL) 800,000 (125,000) Less: Expenses 50,000 25,000 NI (NL) 750,000 150,000) % of completion = 750,000 + (150,000) = 600,000 Zero Profit = P2 (150,000) + expenses 50,000 P1= P200,000 loss Problem 37: On January 1, 2021, Paul Builders accepted a long-term construction project to construct a building with an initial contract price of P10,000,000. The outcome of the construction project can be estimated reliably and the contractor decided to employ cost to cost method. During 2023, the contract price increases due to the change in the project design requested by the client. The following data are provided by the accountant and project manager concerning the construction costs for the three years of construction: Year 2021 2022 2023 Cumulative costs incurred as of the 1,000,000 2 10,800,000 end of the year eee gross profit/(loss) during the : 350,000 | (1,600,000) Percentage of completion as of the end 12.5% 60% 90% of the year What is the Construction cost of sales to be recognized in the Income Statement for the year ended December 31, 2023? a. P5,500,000 c. P4,600,000 b. P4,800,000 d. P5,400,000 Answer A Suggested SolutionLoug Perm Construction Contracts 203 Prior 2021 To date Years Current Year Construction Revenue [10M x 12.5%] -p 1,250,000 * 1,250,000 Cost of Construction 1,000,000 _<——__— 1,000,000 250,000 250,000. Estimated Gross Profit Prior 2022 To date Years Current Year Construction Revenue [10M x 60%] 6,000,000 1,250,000 4,750,000 Cost of Construction 5,400,000 1,000,000 _ 4,400,000 + 600,000, «+ —_250,000¢ _ 350,000 Estimated Gross Profit [1M x 60%] Prior 2023 To date Years Current Year Construction Revenue [ ? X 90%] 6,000,000 Cost of Construction 10,900,000* _5,400,000__5,500,000 Estimated Gross [loss] [1M x 100%} (1,000,000) _ 600,000 € (1,600,000 Actual Cost Incurred To date 10,800,000 Add: Adjustment to cost to recognized 100% loss 2 [100% - 90% completion] x 1M 100,000 Adjusted Cost of Construction to date 10,900,000", Problem 38: On January 1, 2020, Caterpillar Corp. was contracted to build a pool for P2,000,000. In 2021, the design of the pool was modified. As a result, the initial contract price has increased to P2,500,000. The construction was started in 2020 and was completed in year 2022. Caterpillar uses percentage of completion method in measuring the progress of the construction. In year 2022, the cost incurred included costs of variations in contract work amounting to P20,000. These costs were due to customer's fault and it is being currently disputed by Caterpillar. The negotiation with the customer has set and it is probable that the customer will accept the claim for the P20,000 reimbursement. Caterpillar assessed that it has an enforceable right over the claim. The claim is expected to be received upon completion of the contract. The following information on the construction is as follows: ' 2020 2021 2022 Estimated Cost to Complete 2,000,000 800,000 : Cost incurred each year 400,000 __ 800,000 _1,200,000 Req, 1: What is the realized gross profit or loss in year 2021? , P100,000 c. P300,000 b. (100,000) d. P700,000Long Term Construction Contracts 202 Answer D Suggested Solution: zi PL P2 Contract Price 2,100,000 750,000 Total Cost (900,000) (875,000) Est GP 1,200,000 (125,000) x % of completion 67% 100% RGP (RL) 800,000 (125,000) Less: Expenses 50,000 25,000 NI (NL) 750,000 (150,000) % of completion = 750,000 + (150,000) = 600,000 Zero Profit = P2 (150,000) + expenses 50,000 P1= P200,000 loss Problem 37: On January 1, 2021, Paul Builders accepted a long-term construction project to construct a building with an initial contract price of P10,000,000. The outcome of the construction project can be estimated reliably and the contractor decided to employ cost to cost method. During 2023, the contract price increases due to the change in the project design requested by the client. The following data are provided by the accountant and project manager concerning the construction costs for the three years of construction: of the year Year 2021 2022 2023 Cumulative costs incurred as of the 1 499 000 5 10,800,000 end of the year [sat gross profit/(loss) during the a 350,000 | (1,600,000) Percentage of completion as of the end | 15 co, aoe ee What is the Construction cost of sales to be recognized in the Income Statement for the year ended December 31, 2023? a. P5,500,000 b. P4,800,000 Answer A Suggested Solution c. P4,600,000 d. P5,400,000Loug Ten Construction Caebats 203 Prior 2021 To date Years Current Year Construction Revenue [10M x 12.5%] - 1,250,000 - 1,250,000 Cost of Construction 1,000,000 _¢——— _1,000,000 250,000 250,000 Estimated Gross Profit Prior 2022 To date Years Current Year Construction Revenue [10M x 60%] 6,000,000 1,250,000 4,750,000 Cost of Construction 5,400,000 1,000,000 _ 4,400,000 250,000 350,000 Estimated Gross Profit [1M x 60%] _<- 600,000 Prior Years Current Year 2023 Construction Revenue [ ? X 90%] 6,000,000 10,900,000* _5,400,000 _5,500,000 Cost of Construction __10,900,000* _5,400,000__ 5,500,000 _ Estimated Gross [loss] [1M x 100%} << (1,000,000) + _ 600,000 € (1,600,000) 10,800,000 To date Actual Cost Incurred To date ‘Add: Adjustment to cost to recognized 100% loss [100% - 90% completion] x 1M Adjusted Cost of Construction to date “100,000 Problem 38: On January 1, 2020, Caterpillar Corp. was contracted to build a pool for P2,000,000. In 2021, the design of the pool was modified. As a result, the initial contract price has increased to P2,500,000. The construction was started in 2020 and was completed in year 2022. Caterpillar uses percentage of completion method in measuring the progress of the construction. In year 2022, the cost incurred included costs of variations in contract work amounting to P20,000. These costs were due to customer's fault and it is being currently disputed by Caterpillar. The negotiation with the customer has set and it is probable that the customer will accept the claim for the P20,000 reimbursement. Caterpillar assessed that it has an enforceable right over the claim. The claim is expected to be received upon completion of the contract. The following information on the construction is as follows: ° 2020 2021 2022 Estimated Cost to Complete 2,000,000 800,000 - Cost incurred each year 400,000 800,000 1,200,000 Req. 1: What is the realized gross profit or loss in year 2021? a. P100,000 cc. P300,000 b. (100,000) d. P700,000Long Term Construction Contracts 204 Req. 2: What is the realized gross profit or loss in year 2022? a. P120,000 c. P(180,000) d. P(580,000) b. P820,000 Req. 3: What is the amount of Construction in Progress in year 2020, using the percentage of completion method? a. P400,000 b. PO Req. 4: What is the total amount of CIP in year 2021, using zero profit method? a. P1,200,000 cc. P400,000 b. PO d. P800,000 Req. 5: What is the realized gross profit (loss) using zero profit method in year 2021? a. PO b. (800,000) Req. 6: What is the amount of Construction in Progress in year 2021, using the percentage of completion method? c. P800,000 d. P(400,000) c. P400,000 d. P1,100,000 a. 1,200,000 c. 2,300,000 b. 2,140,000 d. 1,500,000 Answer 1) D 2) C 3)B 4) A5)C6)D Suggested Solution: Req. 1 Contract Price 2,000,000 Total Estimated cost to complete Cost incurred prior years - Cost incurred current year 400,000 Cost incurred to date ‘400,000 Estimated cost to complete _ 2,000,000 _2,400,000 Estimated Gross Profit (400,000) x % of completion 100% RGP to date - 2020 (400,000) Contract Price 2,500,000 Total Estimated cost to complete Cost incurred prior years 400,000 Cost incurred current year 800,000 Cost incurred to date 1,200,000 800,000 2,000,000 500,000 Estimated cost to complete Estimated Gross Profity Long Term Constructis ‘a == fit 500,000 stimated Gross PM /2M) 60% % of complet ont 300,000 X5pto date ~? (400,000) ior 700 I 20 —as 2. 2,520,000 tract Price Gontetimated cost to comple ee Cost incurred ee year 1,200,000 Gost incurred Curren 2,400,000 Cost incurred to GANT : 2,400,000 Estimated cost to - iP 120,000 estimated Gross Profi 100% x%of eds 720,000 — RGP to date 220 300,000 + RGP prior ye ROP Preemt year ~ 2022 (180,000 Req. 3 2020 Cost Incurred to date bret Realized loss (400,000) _ Total Construction in progress a 0 Req. 4 2021 Cost Incurred to date 1,200,000 Realized Gross Profit to date : Total Construction in progress 1,200,000 CIP Cost incurred 400,000 Realized gross profit 400,000 ___ Realized loss Total 2020 2 post incurred 800,000 Realized gross profit 400,000 Realized loss otal 2021 1,200,000 Reg. 5 é 2 toe To date Prior years Current year oO - 0 c Pea 400,000, : 400,000 (400,000) : (400,000Long Term Construction Contracts 206 Cost Incurred to date 1,200,000 Realized Gross Profit to date 300,000, 1,500,000 | | 2021 To date Prior years Current year Revenue 1,200,000 0 1,200,000 Cost 1,200,000 400,000 800,000 Profit 5 (400,000) 400,000 | Req. 6 | 2021 | Total Construction in progress Problem 39: SMDC enters into a contract with Mr. Pol to build a building for P10,000,000 on January 2, 20x1 with performance bonus of P200,000 if the building is completed by October 1, 20x1. The bonus is reduced by P10,000 for each week that completion of the building is delayed. The entity usually includes the completion bonuses in the contracts and, based on prior experience, estimated the following completion outcomes: Completed by: _| Probability | Oct. 1 60% Oct. 8 20% Oct. 15, 15% Oct, 22 5% The total transaction price of the contract is: a. P10,000,000 c. P10,193,500 b. P10,200,000 d. P10,120,000 Answer C Suggested Solution 10,200,000 x 60% 6,120,000 10,190,000 x 20% 2,038,000 1,527,000 10,180,000 x 15% 10,170,000 x 5% 508,500 Transaction Price 10,193,500 Problem 40: Using the zero profit method, the contract revenue for the year is: a. Zero b. Equal to the cost incurred recognized during the year Equal to the cost incurred recognized during the year that are probable of recovery d. None of the choice csLong Term Caasteation Canteats 207 Problem 41: The excess of the Construction in Progress over Progress Billings is treated as: a, Current asset c, Other asset b, Current liability d. Non-current asset problem 42: Which of the following may affect the revenue recognized by an entity on construction contract? . I. Incentive payments Il. Penalties Ill. Variation in contact work (change of contract design) WV. Cost escalation a. I, and Ill ce. Il, Mand IV b. 1, and IV d. All of these Problem 43: It is an entity’s right to consideration in exchange for goods and services that the entity has transferred to a customer when that right is conditioned on something other than passage of time. a. Contract receivable c. Contract asset b. Construction in progress d. Contract liability Problem 44: The entity will combine two or more contracts entered at or near at the same time with the same customer into a single contract, except: a. The contractor has submitted separate proposals on the separate component of the project. b. The contract are negotiated as a package with a single commercial objective; c. The amount of consideration to be paid in one contract depends on the price or performance of the other contract. 4. The goods or services promised in the contracts (or some goods or services promised in each of the contracts) are a single performance obligation. Problem 45: It is an entity’s obligation to transfer goods or services to customer for which the entity received consideration from the customer. a. Progress billings c. Contract liability b. Advances from customers d. Contract asset Problem 46: A promised of goods or services is distinct if: Il. The customer can benefit-from the good or service either on its own or together with other resources that are readily available to customer. Ill. The promise to transfer the good or service is separately identifiable from other promises in the contract. a. Tonly c. Both I and II b. only d. Neither I and Il Problem 47: When the company changes its percentage of completion of the construction project every year, how shall the accounting change be treated?Long Term Coustraction Cratracts 03 a. It shall be accounted for as a change in accounting policy treated by retrospective application or with cumulative effect in the beginning retaining earnings at the date of change. b. It shall be accounted for as a change in accotint estimate treated by prospective application to the date of change and future date profit or loss, c. It shall be accounted for as a prior period error treated by retrospective restatement or with cumulative effect in the beginning retaining earnings at the date of discovery of error. d. It shall be accounted for as an equity transaction to be adjusted in the share premium or other comprehensive income as the case may be. Problem 48: A company uses the percentage of completion method to account for a three year construction contract. Which of the following would be used in the calculation of the income recognized in the first year? a, Collection of progress billings c. Mobilization fee b. Progress billings d. Cost Incurred Problem 49: When the company decides to change its accounting for construction contract from percentage of completion to cost recovery method, how shall the accounting change be treated? a. It shall be accounted for as a change in accounting policy treated by retrospective application or with cumulative effect in the beginning retaining earnings at the date of change. b. It shall be accounted for as a change in account estimate treated by prospective application to the date of change and future date profit or loss. It shall be accounted for as a prior period error treated by retrospective restatement or with cumulative effect in the beginning retaining earnings at the date of discovery of error. d. It shall be accounted for as an equity transaction to be adjusted in the share premium or other comprehensive income as the case may be. ce. Problem 50: It 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. a. Fixed price contract c. Cost plus Fixed Fee contract b. Cost plus Variable Fee contract d. Both A and C Problem 51: All of the following could be a valid reasons why the expected revenue from a fixed price construction contract has increased from the original contract price, except a. The contractor has incurred additional costs due to errors made by its employees b. The contractor has agreed variations to the contract with the client. c. The costs in the contract have increased and the contract includes cost escalation clause.Long Teun Coustruction Cratracts 209 d. The contractor would receive an incentive payment if work continues ahead of schedule and it is probable that specified performance standards are met or exceeded. Problem 52: In accounting for a long term construction contract for which there is a projected profit, the balance in the Construction in Progress account at the end of the first year of work using the percentage of completion method would be a. Lower than the zero profit method b. Higher than zero profit method c. The same as zero profit method d. Zero Problem 53: Which statement is incorrect when the outcome of the construction contract cannot be estimated reliably? a. Contract revenue and contract cost shall be recognized by reference to the stage of completion of the contract activity at the end of the reporting eriod. b, Revenue shall be recognized only to the extent of the contract costs incurred that is probable will be recoverable. c. Contract costs shall be recognized as an expense in the period which they are incurred. d. An expected loss on the construction contract hall be recognized as an expense immediately. Problem 54: The following costs shall be capitalized as part of construction in progress or contract costs, except a. Costs of hiring and moving of plant and equipment to and from the contract site. b. Systematically, rationally and consistently allocated construction overheads and borrowing costs. c. Costs that are specifically chargeable to the customer under the terms of the contract may include some general administration costs and development costs for which reimbursement is specified in the terms of the contract. 4. General and research and development costs for which reimbursement is not specified in the contract. Problem 55: Which of the following costs shall be excluded in the contract costs of construction contract? a. Costs that relate directly to the specific contract. b. Costs that are directly attributable to contract activity in general and can be allocated to the contract. ©. Such other costs as are specifically chargeable to the customer under the terms of the contract. 4. Selling costs such as advertisement expense or commissions of real estate agents or brokers.Long Term Construction Crouracts 210 Problem 56: The percentage of completion must be used when certain condition exists. Which of the following is not one of those necessary conditions? a. b. c. a. Total contract revenue can be measured reliably. The buyer can be expected to satisfy some of the obligation under the contract. It is probable that the economic benefits associated with the contract will flow. Estimates of progress toward completion, revenues and costs can be estimated reliably. Problem 57: When there is a significant increase in the estimated total contract costs but the increase does not eliminate the entire profit in the contract. Which of the following statement is correct? a. b. Under the percentage of completion method, only the estimated cost increase requires a current period adjustment of the excess gross profit recognized on the project in prior period. Under both percentage of completion and zero profit methods, the estimated costs increase requires a current period adjustment of excess gross profit recognized on the project in prior periods. No current period adjustment is required. Under the zero profit method, only the estimated cost increase requires a current period adjustment of excess gross profit recogniized on the project in prior periods. Problem 58: In the first year of construction of a building project, the long-term construction company recognized gross loss for the year ended under the percentage of completion method. Which of the following statements will be certain? I. Mm. WV. a. b. ‘The ending balance of construction in progress is equal to ending balance of progress billing. The construction revenue for the year is equal to ending balance of construction in progress. The cost of sales for the year is equal to ending balance of progress billing The ending balance of construction in progress under cost method will be the same to the ending balance of construction in progress under percentage of completion method. Il and IV c. Land II IV only d. I, land IV Problem 59: Aside from the initial amount of revenue agreed in the long-term construction contract, additional revenues may be recognized by the contractor (1) to the extent that it is probable that they will result in revenue and (2) they are capable of being reliably measured. Which of the following will not be considered as additional contract revenue by a contractor?Long Terme Coastrection Contracts 211 Variation in contract work as instructed by the customer regarding the scope of work to be performed. b. Claim that the contractor may seek to collect from the customer for customer caused delays or errors in specification or design. Incentive payments to be paid to the contractor if specified performance standards are met or exceeded or for early completion of the contract. d. Gain on sale of scrap materials from construction. Problem 60: When should the anticipated loss on long term construction contract be recognized under zero profit method and percentage of completion © method? Zero Profit Method Percentage of Completion Method ‘a, Completion of contract Completion of contract b. Immediately Immediately c. Immediately Completion of contract d. Completion of contract Immediately Problem 61: In the computation of the realized gross profit in the final year of construction contract under percentage of completion method, which of the following would be used? . Total Estimated Total Contract Cost to Complete Price Income Previously recognized a Yes Yes No b. Yes Yes Yes e No Yes Yes d. Yes No Yes Problem 62: Cost estimate at the end of the second year indicate a loss will result on completion of the entire contract. Which of the following statements is correct? a. Under the zero profit method, when the progress billing exceeds the accumulated costs, the amount of estimated loss is reported as a current liability. . b. Under zero profit method, when the construction in progress exceeds the progress billings, the estimated loss is added to the accumulated costs. c. Under zero profit meth, the loss is not recognized until the year the construction is completed. . d. Under the percentage of completion method, the gross profit in the first year must not be changed. Problem 63: If the cost recovery method is used, what is the basis for determining the income to be recognized in the second year of a three year contract? a, Cumulative actual costs incurred only b. Incremental cost for the second year only c, Latest available estimated costs d. No income would be recognized in year 2