LONG-TERM CONSTRUCTION

LECTURE DRILLS
Theories.

1. Which of the following statements is TRUE regarding long-term constructions contracts?

a. Upon completion of the project the total billings must equal the contract price likewise all
billings must be collected by the end of the project.
b. Contract retention decreases the amount of collection and the amount to be credited to the
Progress Billings account.
c. Mobilization fee is usually made upon contract signing, upon receiving a certain amount, the
contractor will credit a revenue account.
d. A project resulted in a profit in year one and anticipated loss in year two, the amount of loss
recognized in year two using the percentage of completion method is higher than the loss
recognized using zero profit method.

2. Which of the following statements is FALSE regarding long-term construction contracts?

a. Any anticipated loss resulting from the contract must be recognized immediately and in full.
b. If upon completion of the project the balance of Progress Billings is greater than the balance of
Construction in Progress, the excess is treated as a liability.
c. General administrative costs may be part of contract costs but would usually be expensed.
d. The latest estimates of anticipated cost of materials, labor and subcontracting costs and indirect
costs required to complete a project should be used to determine the progress toward
completion.

3. Which of the followings 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.
c. Such other costs are specifically chargeable to the customer under the terms of the contract.
d. Selling/marketing costs such as advertisement expense or commission of real estate agents or
brokers.

4. The following costs shall be capitalized as part of construction in progress or contract costs, except
a. Site labor cost and supervision cost and 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.
d. General and research and developments costs for which reimbursement is not specified in the
contract.

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Problems.
Problem 1
In 2023, CM Builders agreed to construct a commercial building at a price of P1,000,000. CM Builders
uses the percentage of completion method of recognizing revenue on long term construction projects.
The data relating to the projects from 2023 to 2025 are as follows:

2023 2024 2025

Cost incurred each year 280,000 320,000 185,000
Estimated cost to complete 520,000 200,000 -
Billings to date 150,000 400,000 1,000,000
Collections of billings to date 120,000 320,000 940,000

1. What is the amount of gross profit to be recognized in 2024?

a. 80,000
b. 78,500
c. 85,000
d. 90,000

2. What is the balance of construction in progress net of contract billings account of CM Builders on
December 31, 2024?
a. 350,000
b. 300,000
c. 550,000
d. 380,000

3. Assuming the company uses the zero profit method of recognizing revenue from the project, what
is the balance of the construction in progress account net of contract billings as of December 31,
2024?
a. 200,000
b. 250,000
c. 350,000
d. 300,000

Problem 2
She Construction Co. entered into a fixed price contract for the construction of a private road for He Inc.
She determines the stage of completion of construction contracts using the “cost to cost” method. The
estimated total contract cost is P10,000,000. The following were the actual costs incurred by She during
the first year of the construction:

Costs of negotiating the contract (charged immediately as expense) 100,000

Costs of materials used in construction 3,000,000
Costs of materials purchased but not yet used in construction 500,000
Site labor costs 1,000,000
Site supervision costs 200,000

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 Depreciation of equipment used in construction 120,000
Depreciation of idle construction equipment not used in the contract 60,000
Costs of moving plant, equipment and materials to and from the contract site 40,000
Costs of hiring plant and equipment 140,000

Compute for the percentage of completion of the contract as of the end of the first year.

Problem 3
A contract to construct a building is entered into by Ward Construction Company. The contract price is
P10,000,000. Ward consistently using the percentage of completion method in estimating the profit on
its project. The construction began in 2023 and the following costs were incurred throughout the
completion:
2023 2024 2025
Costs incurred 2,800,000 2,825,000 3,375,000
Estimated costs at completion 7,000,000 9,000,000 9,000,000

Compute for the realized gross profit each period.

Problem 4
On July 1, 2023, Behalf Construction Corporation contracted to build an office building for Bewhole Inc.
for a total contract price of P975,000.
2023 2024 2025
Contract cost incurred to date 75,000 600,000 1,050,000
Estimated cost to complete 675,000 400,000 -
Billings to Bewhole Inc. 150,000 550,000 275,000

1. Under the percentage of completion method, how much is the Construction in Progress at
December 31, 2024?
a. 650,000
b. 575000
c. 672,500
d. 597,500

2. Under the zero profit method, how much is the Construction in Progress, net of Progress Billings at
December 31, 2024?
a. (125,000)
b. 125,000
c. 50,000
d. (50,000)

3. Under the percentage of completion method, how much is the realized gross profit (loss) at
December 31, 2025?
a. (75,000)
b. (100,000)
c. (50,000)

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 d. (72,500)
Problem 5
On January 1, 2023, AA Construction Corporation began constructing P2,100,000 contract. The entity
used the percentage of completion method. For the year ended December 31, 2024, AA Construction
billed its client an additional 55% of the contract price.
2023 2024 2025
Construction in progress 441,000 ? ?
Estimated costs to complete ? ? -
Costs incurred 425,250 969,000 675,750
Excess of CIP over billings (84,000) (330,750) -

1. How much is the estimated cost to complete in 2023?

a. 1,599,750
b. 1,155,000
c. 1,680,000
d. 1,584,000

2. How much is the realized gross profit (loss) in 2024?

a. (45,000)
b. 15,750
c. (60,750)
d. 30,000

3. How much is the balance of construction in progress in 2024?

a. 1,680,000
b. 2,010,750
c. 1,349,250
d. 1,365,000

END

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