Accounting for Construction Contracts (Summary - Step by Step Process)

Step #1: Compute for the Expected Profit or Loss of the Contract
*How?
Total Contract Price XXX
Less: Total Expected Construction Costs
(Cost incurred to date + Estimated Cost to complete) (XXX)
Expected Profit or Loss XX / (XX)
*Why is it important?
1. If there is a profit, recognize revenue using:
a. Percentage of Completion Method (General Rule)
b. Cost Recovery Method (Zero-Profit Method)
*Note: If revenue cannot be measured reliably.

2. If there is a loss, recognize the full amount of loss. (provision)

*Note: This is also known as onerous contract

Step #2: Compute for the Percentage of Completion

*How?
a. Input Method

b. Output Method
*Based on the problem. (surveys of work performed)
*Why is it important?
To determine the amount of revenue to be recognized TO DATE!!! (Cummulative)
**Total Contract Price x POCM

Step #3: Compute for the Current Period Revenues, Costs and Profit
*Note: Always check the previous year amounts (PAS 8)
*How?
1. To check the current period profit or Loss
Profit or Loss to date XXX
Less: Profit or loss recognized in previous years (XXX)
Profit or Loss (Current Period) XXX

2. To check the current period construction costs

Construction Costs to date XXX
Less: Previous year construction costs (XXX)
 Current period Construction Costs XXX

3. To check the revenue of the current period

Revenue recognized to date (Based on Step #2) XXX
Less: Previous year revenues (XXX)
Current Period Revenues XXX

Step #4: Journal Entries

Traditional Accounting PFRS 15
Incurrence of Construction Costs Incurrence of Construction Costs
Construction In Progress XXX Contract Costs
Cash/Payable XXX Cash/Payable

Billings to Customers Billings to Customers

Receivables XXX Receivables
Progress Billings XXX Contract Liability

Collection (if any) Collection (if any)

Cash XXX Cash
Receivables XXX Receivables

Revenue Recognition Revenue Recognition

Construction Costs (current period) XXX Contract Liability
Construction in Progress (P/L C.P) XXX Contract Asset
Construction Revenue (C.P) XXX Contract Liability
Contract Asset
Note: Even Using the Traditional Accounting, you can also compute Revenue
for the Contract Asset/Contract Liability *Note: Contract Liab
are contra-accounts
If the CIP > PB = Contract Asset
If the CIP < PB = Contract Liability
ence of Construction Costs
Contract Costs XXX
Cash/Payable XXX

to Customers
Receivables XXX
Contract Liability XXX

XXX
Receivables XXX

ue Recognition
Contract Liability XXX
Contract Asset XXX
Contract Liability XXX
Contract Asset XXX
Revenue XXX
*Note: Contract Liability and Contract Asset
are contra-accounts as to each other.
Direct materials 5,500,000
Direct labor 2,800,000
Costs of design directly related to the contract 200,000
Costs of technical assistance not directly related to the
contract (properly allocated) 50,000
Costs of rectification work chargeable to customer 300,000
Administrative costs reimbursable by the customer 130,000
Insurance costs 20,000
Construction overheads 1,000,000
Estimated total contract costs 10,000,000

Costs of materials used in the construction 3,000,000

Costs of construction labor 1,500,000
Costs of design directly related to the contract 100,000
Costs of technical assistance not directly related to the
25,000
contract (properly allocated)
Administrative costs reimbursable by the customer 120,000
Insurance costs 15,000
Construction overheads 240,000
Total costs incurred to date 5,000,000

*TCITD/ETCC = POC
50%
 *Gross Profit Computation 20x1 20x2 20x3
Total contract price 10,000,000
(a) Costs incurred to date 3,150,000
Estimated costs to complete 3,850,000
(b) Estimated total contract costs 7,000,000
Expected gross profit 3,000,000
Multiply by: % completion (a) ÷ (b) 45%
Gross profit earned to date 1,350,000
Less: Gross profit in prior yrs. -
Gross profit for the year 1,350,000

Journal Entries (Year 20x1)

Traditional Accounting
I.C.C
Construction in Progress 3,150,000
Cash 3,150,000

Billings
Accounts Receivable 4,000,000
Progress Billings 4,000,000

Collection
Cash 3,600,000
Accounts Receivable 3,600,000

Revenue Recognition
Construction Costs 3,150,000
Construction in Progress 1,350,000
Construction Revenue 4,500,000

CIP VS PB
*Revenue Computation 20x1 20x2 20x3
Total contract price 10,000,000
Multiply by: % of completion 45%
Revenue to date 4,500,000
Less: Revenue recognized in prior yrs. 0
Revenue for the year 4,500,000
Cost of construction * -3,150,000
Gross profit for the year 1,350,000

PFRS 15
I.C.C
Contract Costs 3,150,000
Cash 3,150,000

Billings
Accounts Receivable 4,000,000
Contract Liability 4,000,000

Collection
Cash 3,600,000
Accounts Receivable 3,600,000

Revenue Recognition

Contract Liability
Revenue

Construction Costs
Cost of Construction
Contract Costs
 20x1
Revenue (a)

Contract costs incurred per yr.(b)

Gross profit for the year

Journal Entries (Year 20x1)

Traditional Accounting
Construction in Progress
Cash/Payable

Receivable
Progress Billings

Cash
Receivable

Construction Costs
Construction Revenue
20x2 20x3

PFRS 15
Contract Costs
Cash/Payable

Receivable
Contract Liability

Cash
Receivable

Contract Liability
Construction Revenue

Construction Costs
Contract Costs
  20x1 20x2 20x3
Total contract price
Estimated total contract costs
Expected profit (loss)
Multiply by: % of completion (b)
Profit (loss) to date
Profit (loss) in prior yrs.
Profit (loss) for the year

20x1 20x2 20x3

Contract price
Costs incurred to date (a)
Estimated costs to complete
Estimated total contract costs
Expected profit (loss)

Revenue 20x1
Less: C/C
Gross Profit
 20x1 20x2
Total contract price(1)

(a) Costs incurred to date (2)

Estimated costs to complete (given)
(b) Estimated total contract costs
Expected gross profit from contract
Multiply by: Percentage of completion (a) ÷ (b)
Gross profit earned to date
Less: Gross profit earned in previous years
Gross profit for the year

20x1 20x2
Total contract price
Multiply by: Percentage of completion
Revenue to date
Less: Revenue recognized in previous yrs.
Revenue for the year
Cost of construction (squeeze)
Gross profit for the year
 20x1 20x2
Total contract price
Estimated total contract costs
Expected total profit from construction
Multiply by: % of completion
Gross profit to date
Gross profit recognized in prior years
Gross profit for the year

20x1 20x2
Total contract price
Multiply by: % of completion
Revenue to date
Revenue in prior years
Revenue
Cost of construction (squeeze)
Gross profit for the year (see above)
Impairment loss on receivable (4% x 10M)
Profit for the year