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    22 views29 pages

    LTCC Problems

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    Mondays And

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    © All Rights Reserved
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    Introduction date when the activity is Co the primary issye in accounting for const revenue and contract eee Contract Costs Gontract costs should comprise: at b. cs Costs that relate directly to the specific contract; Costs that are attributable to contract activity in general and can be allocated fo the contract; and Such other costs as are specifically chargeable to the customer under the terms of the contract. 2 Method of Construction Accounting A Percentage of Completion Method. when the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction 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. -Measuring the Percentage of Completion. _ ine stage.of completion ot a contract. _ The enterprise uses the ees sthod dhe proportion thal conkact coms incuned for fo date bear to the estimated total contract 5 d method. This is based on surveys of work: ° Revenue Recognition ~ Construction Accounting sb vi. vil. “the percentage’of completion mained applied 6p oe cumuaivelbatls (esata Recognition of Expected or Anticipated Losses og When it is probable that total contract costs will exceed total contract revenue. the expected loss should be recognized as an expense immediately. 6 The amount of such a loss is determined irrespective of: Whether or not work has commenced on the contract; b. _ The stage of completion of contract activity; or ¢. The amount of profits expected to arise on other contracts which are not treated 5 a single construction contract. Changes in Estimates accounting period fe the currant eslimatas of Genliact rexens= Suess ammae ag Therefore, the effect of a change in the estimate of contract revenue of contract, or the effect of a change in estimate of the outcome of a contract, oe a change in accounting estimate (see PAS No. 8, Accounting Chan: estimates are used in the determination of the amount of revenu' recognized in the income statement in the period in which the. subsequent periods. vill. Contract fentions 260 x Pan zz Chapters Pa at Rete eelu stile by Notes to the Examinees: One prominent difference between PAS and US FASB is that PAS No. 11 does not allow Completed-contract method. Under the provisions of PAS No. 1, the percentage-of- comple tion should be used whenever the outcome of a construction contract can be reliably es In those cases in which this is not possible, & zero-profit approach is used. A zero-profit ap- proach involves recognizing revenues equal to the amount of costs incurred during the periog so that no net profit is recognized. But as soon as the ultimate outcome of a contract can be estimated, the percentage-of-completion method is applied; the cumulative revenues ond Costs recognized under the zero-profit approach are used in computing the revenues and eosts to be recognized for the current period. \ Implication of PFRS 15 on Construction Contracts Revenue Recognition Over time Under certain circumstances companies recognize revenue o% notable context in, which revenue may be ees over contract accounting. A company recognizes revenue fime i E neice ogni enue over lime it ct legs ope revenue Recognition — Construction Accounting 261 1. Mediocre Inc. has entered into a very profitable fixed price contract for ‘constructing a high-rise building over a period of three years. It incurs the following Costs relating to the contract during the first year: . Cost of material = P2.5 million . Site labor cost = P2.0 million 3 + Agreed administrative costs as per contract to be reimbursed by the customer = P1 million. g * Depreciation of the plant used for the construction = P0.5 million. + Marketing costs for selling apartments, when they are ready = P1.0 million Total estimated cost of the project = P18 million. The percentage of completion of this contract at the year-end is: a. 33 1/3% (= 6.0/18.0) Cc. 25% (=4.5/18.0) — b. 27% (=4.5/16.5) 3 d. Miracle Construkt, Inc. is executing a gigantic p tallest boarding house in the country. The projectis 262 —hepre 5 Calculate the revenue costs and profit to be recognized in 2011: ‘ Revenue Costs Gross Profit (loss) . \P5,400,000 4,500,000 900,000 b. 5.400.000 5,500,000 (100,000) c. 6,000,000 4,500,000 1,500,000 d. 6,000,000 5,500,000 900,000 3. The company signed an P800,000 contract to build an. environmentally friendly access trail to Morayta, Manila. The project was expected to take approximately 3 years. The following information was collected for each year of the project - Year 1, Year 2, and Year 3; Cost — Expected Support. Additional Trail feet Additional additional timbers laid support constructedtrail feet to during the cost to during the timbers to. during the be ‘ear completion __year be laid year _ constructed ‘Year! -P100,000 450,000 150 850 Yeor2 150,000 280,000 300 520 Year3 250,000 -0- 500 ” 1,000 a Cannot be determined * g the same information in No. 3, comput Mor Sei caes Year 3, assume that the compagmount Of revenue: have been '@ Company e outp ecsures its progress by the. Number ot * Reyenue Recognition - Construction Accounting 6 263 DJ Builders, Inc. has consi i eee ieee Sstently used the percentage-of-completion method ‘on a P9,000,000 fixed-price construction 12/31/2015 12/31/2016 Cumulative contract costs incurred .. P3,900, Pe Estimated total costs at completion ¥/300,000 8100000 How much income would DJ have re i i t for the year ended December 31, 2016? (eco ie 20108 See a. —P100,000 cc. — P600,000 b. 300,000 d. 700,000 (AICPA) . DJ Builders Construction Corporation contracted to construct a building for eS P400,000:\Construction began in 2015 and was completed in 2016. relating to the contract are summarized below: é: 264 How much income should Bon have recognized in 2016? a. P'100,000 ee P150,000 b 110,000 d 200,000 (AICPA) 9. Ube Construction Company has consistently used the percentage-of-compleion © method. On January 10, 2015, Ube began work on a P6,000,000 Contract.At the inception date, the estimated cost of construction was P4,500,000, e The following data relate to the progress of the contract: om Income recognized at 12/31/2015 .. Cost incurred 1/10/2015 through 12/31/20 Fstimated cost to complete at 12/31/2016. Costs incured to 1/1/2015 P 600,000 1,560,000 Revenue Recognition ~ Cor +, yunting wing information relates to a flood control project of JJD Construction Co. which was started in 2015 and completed in 2016: Costs incurred to-date: As.at June 30, 2015 .... P 9,750,000 As at June 30, 2016 .... 15,750,000 ieee The followin: a Estimated total cost on co As at June 30, 2015 .. As at June 30, 2016 .. The project is a P22,500,000 fixed-price construction contract, and . the percentage-of-completion method of revenue accounting. 2016, how much income would JJD report on the a. P250,000 b. 300,000 During 2015, Mitch Corporation started. ac Price of P600,000. Any costs incurred a was completed on December 15, #4 266 Chapter 5 Any costs incurted are expected to be recoverable. Under the cost recovery method-construction accounting (zero-profit approach), what jemount should Jay Company recognize as gross profit for 2016: are Pi-05 c. 10,000 b. 4,000 d. 12,000 (Adapteg) |. The Kirby Construction: ‘Company has consistently used the cost recovery method —construction accounting method. of recognizing income (2ero-profit approach) In 2015, it began a construction Project to erect a building for P3,000,000. The Project was completed during 2016. Under this method, the accounting records disclosed the following: (any costs incured are expected to be recoverable) Revenue Recognition — Construction Accounting, 9. eee What is the percentage of completion during the year 2016? 28.00% <. 50.00% 33.33% d. 83.33% The October 1, 2014, Oldies Corp. enters a contract to build a sports which it estimated would cost P3,120,000. Oldies bills its clients a 20% and recognized construction revenue on a percent basis. Data on this project for 2014, 2015, and 2016 follow: 268 Chapter $ A 2S Sie Sa 18. DJ Builders Company began operations on January 1, 2016. During the year, DJBuilders Company entered into a contract with Joey Company to Construct manufacturing facility. At that time, DJ Builders estimated that it Would take five years to complete the facility at a total cost Of P4,800,000. The contract price for construction of the facility is P5,800,000, nt of construction in t) — due from customers (net) - due to customers (o) 38 5 . 269 . Lovely Co. recognizes construction revenue and expenses using the percentage-of-completion method. During 2015, a single long-term. project was begun, which continued through 2016. Information en the project follows: 2015 2016 ‘Accounts receivable from construction contract P 100,000 Construction expenses 105,000, Construction in progress Partial billings on contract Profit recognized from the long-term construction contract in 2016: shouldbe a. —P 50,000 b. 108,000 During 2016, Rizza started work on a P3,000,000 fir contract. Any costs incurred are ¢ {to be rece 270 - — Chapter 5 Initsincome statement for the year 2016, the company would recognized g gross profit (loss) of: (Zero-profit SPEED -Completion _ Cost Recovery Method E Bae age. OF: Corned of Construction Accounting “a. P(g00000) pea f psn ( 75,000) 2 (298000) (100,000) a. (225,000) oe (Adapted) 23. No Power Co. was tapped to build private electric plants in the towns of and Calavan. The following information relate to these projects during 2016. Any costs incurred are expected fo be recoverable Contract price Costs incumed to date Est'd costs to complete F Billings during the year..... Collections during tt (Zero-profit approac Cost Recovery Me thon! of Construction Accounting oF Construction Accounting P(500,00¢ ee, Revenue Recognition — Construction Accounting What gross profit (loss) should Uberita Corp. recognize in 2016? . — P'120,000 gross profit ‘¢. P4BD,000 gross loss b. 240,000 gross toss d. 720,000 gross loss soles . ST. Construction Company's construction jobs, which commenced during 2016: Project ¥ Contract price .. Costs incurred during 2016. Estimated costs to eae Billed to customers during 2016. Received from customers during 201: General and administrative expenses Itis therefore agreed between the contractor ond the: incurred ore Soe eee ere 272 27. Chapter 5 The company accounts for its large jobs by the St tea of COMPletion method - output measures. Bilings are done as follows: (a) 20% down Yent upon Contract signing, and (b) balance is billed CCording to perfontoug ‘of completion, less an application of the down Payment which is also according to percentage of completion. “How much (1) total billings were made, and (2) total revenue that shoug be recognized for the year? @. (1) P203,286; (2) 120,060 Cc. (1) P 99,540; (2) P120,.060 b. (i) 99,540; (2) 172.910 d. (1) 203,286; (2) 172910 (PhiICPA) Mtoe Jee Builders was contracted to build the private road Network of {ipod Subdivision for P100 milion, The project wos omoocvey tobe finished in 2years, and the contract provided for ~_ Afive per cent mobilization fee (to be ded ted from the last billing), Ravebe within 15 days rom the contact sears ees z. Z A retention ten i final bil je ‘ Payment Progress billings ee the bills presented, — lary S of next year. Wi which was due Ja 273, ction A cconn ttt SS ee AJD. which uses the percentage-of-completion method of accounting, estimated a 25% gross margin on the project. By the end of 2016, AJD had presented progress billings corresponding to 50% completion. All of the progress billings presented in 2016 were accepted, except the last one for 10% which was accepted on January 5, 2017. With the exce| f one bill for 8% which was due on January 7, 2017, all of the billings accepted in — 2016 were settled. Payments made by Village Company in 2016 amounted — to: # e a. — P33,800,000 ~-¢. — P40,000,000~ b. 38,500,000 d. 45,000,000 On September 30, 2016, Joja Co., Inc. was awarded the contract 1,000-room hotel for P120 million. Among others, the parties ag following: = Chapter - —Shapter § Complete the (1) estimated costs to complete the project at December 3), 2015, and (2) the actual cost incurred during the year 2016. 2. (1) P1;700,000; (2) P2,550000 c. (1) —P_ 896,000; (2} F2.050,000 b. Hy 1,700,000; (2) 2,050,000 d. (1) 1,700,000; (2) 2.200,000 (Adapted) 31. AJD Builders entered into a contract to construct an office building and plaza ata contract price of P10,000,000. Gross profit is to be recognized using the percentage of completion method — output measures as determined by estimates made by the architect. The data below summarize the activities ‘on the Gonstruction for the yeas 2014 through 2016: Actual Estimated Percentage Complete Progress _ Year Cost Incurred Cost to Complete Architect's Estimate Billings 2014 P3,200,000 6,000,000 2015 4,300, ~ 1,600,000 1 350,000 741,758; P950,000 200,000; 475,000; 275,000 ° Construction Accounting Using the same information in Number 3], compute the construction in Progres (net of progress billings) on December 31, 2015. a = oe P9750. - dc 441,758 2 (Adapted) Lovely Construction Co. was engdged on October 1, 2016 to construct a Building for a. contrac! price of PS-400,000 payable in 5 installments. One-fit of the Contract price was to be paid upon completion of each quarter of the work (as defined in detail by the terms of the contract), the final, n being due within 10 days after acceptance of the completed project. By-December 29, 2016, 3/4 of the building had been completed v the third billing was made in accordance with the terms of the c cash had been received on the previous billings). During 2016. < had peony by Level So ogee outstanding accounts payable for materials pur Lovely expected that an additional P 1,800,000 would be re the project. : a Using percent the gross profit fo be 8 "Bisa sos 292 Chapter § Appendix for SMEs — Construction Contracts Comparison with Full PERSs ction Contr \d the PERS for SMEs (see Section 23 Revenue CEES eo news ine some principles for accounting and reporting construction Sbatrocts. However, the PFRS for SMEs is drafted in simple language and provides less guidance ‘on how to apply the principles. Following are problems in construction accounting for SMEs that is also applicable to Full PFRSs: MULTIPLE CHOICE QUESTIONS 1. Under‘a construction contract, a contractor agrees to a fixed contract Price of P2,000 to refurbish the kitchen of a residential flat. The contractor's initial estimate of contract costs on February 1, 2016, the date the contract __ is agreed, is P1,200. The contractor has a December 31 year-end. The contract price will be ete ontractor on completion of the refurbishment. Revenue Recognition ~ Constructi In Accounting Bee Revenue Recognition Consiructon Accounting | _ f The contractor determines the stage of completion of the contract by calculating the proportion that contract Costs incurred for work performed to date bear to the latest estimated total contract costs. The contract revenue and contract costs for 2015 amounted to: Revenue Costs Revenue — Costs a. P2000 P1,250 cP 533 P 800 b....P 1338 P 800 ee ee Poe 3. Using the same information in No. 2, c contract Costs for 2016 amounted to: -ompute the contract revenue and Under a construction contract, a contractor agrees to 1 cent fixed return on its direct cont costs | contractor's initial estimate of contract costs o : _ the contract is agreed, is P2,000 Therefore, expected Chapter 5 294 5. Using the same information in No. 4, the contract revenue and Contract ” costs for 2016 amounted to: Revenue Costs Revenue Costs a. Peis P 2,000 en, ge 057: P 755 f b. P2,800 P 955 di: @.P1,057 P 955 6. Acontractor enters into a construction contract on January 1, 2015. The contractor agrees to a fixed price of P9,000 to build a bridge. The contractor's initial estimate of contract costs is P8,000. The contract expects that it will take three years to build the bridge. The contractor has a December 31 year-end. i es) athe fee year of the contract (December 31, 2015), the < 's estimate of total costs has increased to P8,050 ir in 2015 amounted to P2,093). eres that contract costs incurred Bere giedctal contract costs: Revenue | 2 A construction contractor has a-fixed pri 4 P100,000 to construct a building (the project). Entrees The contractor's estimate of total contract costs is P60,000. It will take two years to construct the building. At the end of the first year of the Project (31 December 2016): the contractor has incurred costs of P20,000 on the contract, including P2,000 on cement that is held offsite a an independent surveyor certified that 28 percent of the contract work is Completed the site was cleared (stipulatedin the contract fo constitute 10 p of the total project), the foundation laid (stipulated as 5. the total project) and the walls of the building erected | 14 percent of the total project) oes pevenue Recognition ~ Construction Accountin ‘CS ara onstruction Accounting 295 g, A construction contractor has a i fixed pri + for P100,000 to construct a building (the project). Price contract for The contractor's estimate of total contract costs is P60,000. It will take two years to construct the building. At the end of the first year of the project (31 December 2016): the contractor has incurred costs of P20,000 on the contract, including P2,000 on cement that is held offsite an independent surveyor certified that 28 percent of the contr work is completed 2 “ the site was Cleared (stipulated in the contract to constitute 10 percent of the total project), the foundation laid (stipulated as 5 percent of the total project) and the walls of the building erected (stipulated 14 percent of the total project) os g The contractor determines that the st of comple’ contract is measured most refere costs incurred for work per costs. Chapter 5 296 ‘A construction contractor has a fixed price contract for P100.000 to construct a building (the project). The contractor's initial estimate of total contract costs is P60,000. It will Eppes paces to corsinicl ine ulciog, “ atthe end of the first year of the project (31 December 2014) the contractor has incurred costs of P20,000 on the contract, including P2,000 on cement that is held offsite. The entity's estimate of total contract costs has stayed the same. The contractor determines the stage of completion of the construction contract by reference to the proportion that costs incurred for work Performed to date bear to the estimated total costs. Determine the revenue, expenses, and profit for the year 2016: Revenue Expenses Profit Revenue Profit Br 80,000 P1800 P12.000 c. P31333 PI8,000 P13.333 _b. P32,000 P20.000 P12000 d. P33.333 No. 11. andif the contra ae Construction c reg on determines the Revenue Recognition ~ Construction Accounting 15. 297 Using the same information in No. 11, and if the contractor determines the stage of completion of the construction contract by reference to independent surveys of work performed. At the end of 2016 the project was certified to be 32 percent complete. Progress billings of P30,000 have been made at the end of 2016 and the customer has paid P20,000 of these progress billings. Determine the revenue, expenses, and profit for the year 2016 by using the actual cost approach: Revenue Expenses Profit Revenue Expenses Profit a. P32,000 P18,000 P14,000 c. P30800 18,000 P12.800 b. P30,000 20,000 P10,000 d. P32,800 20,000 P12,800 . Using the same information in Nos. 11 and 15, compute “the gross amount due from customers for contract work" for this contract: a. P32,000 c. P28,000 gt Pg b. —P30,000 d. P 2,000 tele = A construction contractor has a fixed price ‘contract for P100.000. construct a building (the project). ‘ 298 19, Chapter 5 same information it “the gross amount due Using tion in No. 17, compute from BN aon for contract work" for this contract: c. P90,000 a. P110,000 b. P105,000 - d. P70,000 In-2015 a contractor completed the construction of a building for a customer. The contractor recognized the P100,000 fixed price contract in revenue in the two year construction periad using the percentage of completion method. In2016 when the customer owed the contractor P100,000 for constructing the . a tsunami destroyed the customer's business. At the end of 2016 the liquidator of the customer had informed the customer's creditors that they would receive a liquidation dividend of 10 per cent of the amount owed to them by the customer in full and final settlement of the debt. _ In 2016 when the Collectibility of the amount was ni _ contractor must recognize an expense of ee revenue Recognition - Construction Accounting 299 2i . A construction contractor builds a home under a contract wi xe At the end of 2015, 2016 and 2017 the customer paid the contractor progress pilings of P5,000, P3,000 and P4,200 respectively. The contractor determines the stage of completion of the contract by calculating the proportion that contract costs incurred for work performed to date bear to the latest estimated total contract costs. Determine the profit (loss) for each year: 2015, 2016 2017 2015 2016 2017 Q. -P1,500-

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