Professional Documents
Culture Documents
Chapter 7
Construction Contracts
NAME: Date:
Professor: Section: Score:
LONG QUIZ:
1. e-Tag Co. enters into a construction contract with a customer. PFRS 15 requires e-Tag to do all of
the following at contract inception, except
a. assess the customer’s ability and intention to pay the contract price on due date.
b. assess whether the promised goods and services in the contract are individually distinct.
c. determine if the performance obligation(s) identified in the contract is(are) satisfied over
time or at a point in time.
d. estimate the total construction costs at completion.
2. “Step 2” of the revenue recognition principles of PFRS 15 requires an entity to identify the
performance obligations in the contract at the inception of the contract. Which of the following
statements is not correct regarding this step?
a. An entity shall treat each promise in the contract to transfer a distinct good or service as a
separate performance obligation.
b. An entity shall treat a promise to transfer a distinct bundle of goods or services as a separate
performance obligation.
c. An entity shall treat a promise to transfer a series of distinct goods or services that are
substantially the same and have the same pattern of transfer to the customer as a separate
performance obligation.
d. An entity shall treat all promises in a single contract as a single performance obligation
regardless of the nature of those promises, if those promises are negotiated with the
customer as a single package.
4. At contract inception, Metallica Co. determines that its performance obligation in the contract is
a single performance obligation that is satisfied over time. Metallica Co. uses the cost-to-cost
method to measure its progress in the contract. How much is the profit recognized in 20x1?
a. 118,000 c. 122,000
b. 120,800 d. 132,200
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5. Metallica Co.’s performance obligation in the contract is satisfied over time. However, the
outcome of the performance obligation cannot be measured reasonably but contract costs
incurred are recoverable. How much is the revenue recognized in 20x1?
a. 708,000
b. 590,000
c. 118,000
d. 0
6. Metallica Co.’s performance obligation in the contract is satisfied at a point in time, i.e., when the
construction is completed and control over the promised good is transferred to the customer.
How much is the revenue recognized in 20x1?
a. 708,000
b. 590,000
c. 1,200,000
d. 0
7. VALEDICTION Construction Co. entered into an ₱80M fixed price contract for the construction
of a private road for FAREWELL SPEECH, Inc. The performance obligation on the contract is
satisfied over time. VALEDICTION measures its progress on the contract using the “cost-to-
cost” method. The estimated total contract cost is ₱40M. VALEDICTION incurred the following
costs in the first year of the construction:
9. What amounts are presented in Contractor Co’s. statement of financial position under <List A:
Traditional accounting> and <List B: PFRS 15>?
Gross amount due from (to) cust. Contract asset(liability)
a. (20,000) (20,000)
b. 20,000 20,000
c. 20,000 (20,000)
d. (40,000) (40,000)
10. In 20x1, Silverchair Co., a construction company, enters into a contract with a customer for the
construction of a building. The contract states a fixed fee of ₱8,700,000. Silverchair’s performance
obligation in the contract is satisfied over time. Silverchair uses the ‘cost-to-cost’ method in
measuring its progress in the contract. Information on the contract follows:
20x1 20x2
Estimated total costs at completion 6,525,000 6,960,000
Percentage of completion 15% 65%
In 20x1 and 20x2, it was not highly probable that the project will be completed on time. However, in
20x3, ABC assessed that the project will be completed earlier than originally expected and thus it is
now highly probable that the incentive payment will be received.
Salamagi Co. estimated a ₱5,000,000 gross profit from the project. The percentage of completion
method will be used. In 20x1, Salamagi billed the customer for 50% completion of the project. The
customer accepted all the billings, except one for 10% which was accepted on January of the
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following year. All the accepted billings were collected during the year except an 8% billing which
was due January of the following year.
15. What is the amount of profit recognized from the contract in 20x1?
a. 2,500,000 c. 2,720,000
b. 2,650,000 d. 2,900,000
16. What is the total amount of collections from the billings in 20x1?
a. 5,760,000 c. 6,760,000
b. 6,400,000 d. 7,400,000
The entity uses an input method based on costs incurred to measure its progress towards complete
satisfaction of the performance obligation. The customer obtains control of the elevators when they
are delivered to the site in December 20X2, although the elevators will not be installed until June
20X3. The costs to procure the elevators are significant relative to the total expected costs to
completely satisfy the performance obligation. The entity is not involved in designing or
manufacturing the elevators.
As of December 31, 20X2, the entity has incurred total costs of ₱500,000, excluding the cost of the
elevators.
19. An entity, a construction company, enters into a contract to construct a commercial building for
a customer, on customer-owned land, for a promised consideration of ₱1 million and a bonus of
₱200,000 if the building is completed within 24 months. The entity accounts for the promised
bundle of goods and services as a single performance obligation satisfied over time because the
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customer controls the building during construction. At the inception of the contract, the entity
expects the following:
Transaction price ₱1,000,000
Expected costs 700,000
Expected profit (30%) 300,000
At contract inception, the entity does not expect to receive the bonus because it cannot conclude that
it is highly probable that a significant reversal in the amount of cumulative revenue recognized will
not occur. Completion of the building is highly susceptible to factors outside the entity’s influence,
including weather and regulatory approvals. In addition, the entity has limited experience with
similar types of contracts.
The entity determines that the input measure, on the basis of costs incurred, provides an appropriate
measure of progress towards complete satisfaction of the performance obligation.
The entity reassesses the variable consideration and concludes that the amount is still constrained.
In the first quarter of the second year, the parties to the contract agree to modify the contract by
changing the floor plan of the building. As a result, the fixed consideration and expected costs
increase by ₱150,000 and ₱120,000, respectively. In addition, the allowable time for achieving the
₱200,000 bonus is extended by 6 months to 30 months from the original contract inception date. At
the date of the modification, on the basis of its experience and the remaining work to be performed,
which is primarily inside the building and not subject to weather conditions, the entity concludes
that it is highly probable that including the bonus in the transaction price will not result in a
significant reversal in the amount of cumulative revenue recognized. In assessing the contract
modification, the entity concludes that the remaining goods and services to be provided using the
modified contract are not distinct from the goods and services transferred on or before the date of
contract modification; that is, the contract remains a single performance obligation.
How much is the cumulative catch-up adjustment to revenue recognized on the date of contract
modification? (round-off percentage of completion to one decimal place only)
a. 89,200 c. 92,800
b. 91,200 d. 93,400
20. ABC Co. started work on a construction contract in 20x1. The contract price is ₱10M. However,
the contractual agreement stipulates that if the cumulative inflation reaches or exceeds 26%, the
contact price shall be adjusted upwards by 10%. Additional information on the contract is shown
below:
20x1 20x2
Costs incurred to date 2,400,000 4,500,000
Estimated costs to complete 3,600,000 1,500,000
Cumulative inflation rate 18% 27%
b. 1,980,000 d. 2,150,000
“Come to Me, all you who labor and are heavy laden, and I will give you rest.” (Matthew 11:28)
- END -
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ANSWERS:
1. D
2. D
3. D
4. A
Solution:
7. C
Solution:
Costs of materials used in construction 12,000,000
Site labor costs 4,000,000
Site supervision costs 800,000
Depreciation of equipment used in construction 480,000
Costs of moving equipment and materials 160,000
Costs of hiring equipment 560,000
Contract costs incurred to date 18,000,000
Divide by: Estimated total contract costs 40,000,000
Percentage of completion 45%
Multiply by: Contract price 80,000,000
Revenue in first year 36,000,000
8. B
Solution:
Total contract price 600,000
Multiply by: Percentage of completion (a) 33 1/3%
Revenue to date 200,000
Less: Revenue recognized in previous yrs. -
Revenue for the year 200,000
(a)
Costs incurred to date (1) 120,000
Estimated costs to complete 240,000
Estimated total contract costs (2) 360,000
Percentage of completion (1) ÷ (2) 33 1/3%
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9. B
Solution:
Traditional accounting:
Construction in progress
Costs incurred 120,000
(b)
Gross profit 80,000
12/31/x1 200,000
(b)
Revenue for the year (see previous solution) 200,000
Cost incurred during 20x1 (120,000)
Gross profit - 20x1 80,000
PFRS 15:
Contract liability
180,00
0 Progress billing
Revenue in 20x1 (see prev. sol.) 200,000
Debit balance - Asset 20,000
10. A
Solution:
20x1 20x2
Contract price 8,700,000 8,700,000
Estimated total costs at completion (6,525,000) (6,960,000)
Expected total gross profit 2,175,000 1,740,000
Percentage of completion 15% 65%
Profit to date 326,250 1,131,000
Profit in prior yr. (326,250)
Profit for the yr. 326,250 804,750
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11. B
Step 1: Pro-forma computation
20x1 20x2
Revenue to date ? ?
Contract costs incurred to date (2,250,000) (4,800,000)
Profit to date 750,000 1,200,000
Profit in previous years - (750,000)
Profit for the year ? ?
12. B - Since the contract is 100% complete in 20x2, the transaction price must be equal to the
‘revenue to date in 20x2’ of ₱6,000,000 (see previous solution).
13. C
Solution:
20x1 20x2 20x3
Costs incurred to date (a) 2,400,000 4,575,000 6,125,000
Estimated costs to complete 3,600,000 1,525,000 125,000
Estimated total contract costs (b) 6,000,000 6,100,000 6,250,000
Multiply by: Cost + Var. fee 120% 120% 120%
Total 7,200,000 7,320,000 7,500,000
Incentive payment 200,000
Estimated total contract price 7,200,000 7,320,000 7,700,000
Multiply by: % of completion (a) ÷ (b) 40% 75% 98%
Revenue to date 2,880,000 5,490,000 7,546,000
Less: Revenue in prior yrs. - (2,880,000) (5,490,000)
Revenue for the year 2,880,000 2,610,000 2,056,000
(1)
Cost of construction (2,400,000) (2,175,000) (1,550,000)
Gross profit for the year 480,000 435,000 506,000
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(1)
The costs incurred each year are computed as follows:
20x1: 2.4M costs incurred to date – 0 costs incurred in previous yrs. = 2.4M
20x2: 4.575M – 2.4M = 2.175M
20x3: 6.125M – 4.575 = 1.55M
15. A Solution:
20x1
Expected gross profit (given) 5,000,000
Multiply by: % of completion (given) 50.00%
Profit to date 2,500,000
Profit in previous years -
Profit for the year 2,500,000
16. C Solution:
Collection from mobilization fee (20M x 5%) 1,000,000
17. B
Solution:
Control over the elevators is already transferred to the customer (as stated in the problem). However, the
incurrence of the cost of the elevators does not properly reflect the percentage of completion of the
contract because the elevators are not yet installed. Accordingly, the entity shall adjust its measure of
progress to recognize revenue only to the extent of the costs of the uninstalled elevators. The cost of goods
sold recognized in 20X2 will also include this cost. As a result, the entity recognizes zero profit from the
elevators in 20X2.
Percentage of completion = (500,000 costs incurred, excluding cost of elevators) ÷ (2.5M ‘other costs’ only,
excluding costs of elevator)
Percentage of completion = 20%
[(5M transaction price – 1.5M cost of elevators) x 20%] + 1.5M cost of elevators = ₱2,200,000 revenue in
20X2
18. C
Solution:
Cost of goods sold in 20X2:
[(2.5M ‘other costs’ only, excluding the costs of elevators) x 20%] + 1.5M costs of elevators = ₱2,000,000
cost of goods sold in 20X2
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Or
(5M transaction price – 1.5M cost of elevator) x 20% = 700K revenue excluding elevator – 500K costs
excluding elevator = 200K
19. B
Solution:
20x1 20x2
Original contract price 1,000,000 1,000,000
Bonus - 200,000
Contract modification 150,000
Total 1,000,000 1,350,000
Percentage of completion (a) 60% 51.20%
Revenue to date 600,000 691,200
Revenue in prior yr. (600,000)
Revenue for the year 600,000 91,200
(b)
700,000 + 120,000 increase due to contract mod. = 820,000
20. D
Solution:
20x1 20x2
Total contract price 10,000,000 11,000,000 *
(a) Costs incurred to date 2,400,000 4,500,000
Estimated costs to complete 3,600,000 1,500,000
(b) Estimated total contract costs 6,000,000 6,000,000
Expected profit (loss) 4,000,000 5,000,000
Multiply by: % of completion (a) ÷ (b) 40% 75%
Profit (loss) to date 1,600,000 3,750,000
Profit recognized in prior years - (1,600,000)
Profit (loss) for the year 1,600,000 2,150,000