Chapter 12 LONG-TERM CONSTRUCTION CONTRACTS Introduetion ed in accountng for construction contracts in finanig ea ne aes “The objective of this standard is to prescribe the sarsrmtng teatvent of revenue and coats associated ‘with construction contracts, ‘enzo the naue ofthe stivty undertake in construction ‘contracts, the date at activity is entered into and the date when the activity s completed usually fall into different sccounting periods. Therefore, the primary issue in ‘accounting for construction contracts is the allocation of contract revenue and ontat cats othe accountng eros in wich constuction work is performed, which the CONSTRUCTION CONTRACTS ‘A construction contract may be negotiated for the construction of a single asset, such as bridge, in, road, shi |. A construction may also deal ich are closely interrelated or imerdependent in terms of their design, technology and function or their ultimate Purpose or use. Examples of such con clude those for the construction of ‘refineries and cther complex pieces of plant and equipment. Construction tontracis are formulated in a number of ways which are classi 1. Fixed Price Contract struction contrat in which the contractor agrees a fixed contract & fixed rate per unit of ouput, which in some cases is subject to escalation clauses, 2. Cost Plus Contract construction contract le or otherwise defi in which the contractor is reimbursed for fee, ined costs, plus a percentage of these costs oF @ separately. In some cases, however nie parts of single contract or ty Substance ofthe contractor a lly applied to each construct jon contract a group of nt) © apply the standard to separate ot Contact a one in order to reflect the 0up of contract, Segmenting Construction Contract ‘When a contract covers the cor of a number of asses, the contract for teed a separate contract when: ited foreach asset, ‘Separate negotiation and both contractors and customer were able to acceptor eject thet ‘contract relating cocoon sect that pat of the. relating to 3. The cost and revenue of each asset are separately identifiable (On the other hand, the construction ofthe additional aset shall be treated as a separate construction contract wl 1, The asset differs signi asset or assets covered by t 2. The price of the asset is negot price, design, technology or function from the inal contrac; ot without regard to the original contract, Combining Construction Contract A group of contract, whether witha single customer or with several customers, shall be treated as a single construction contract when: 1. The group of contract is negotiated as one single package, 2. The contracts are so closely interrelated that they are effectively part of a single project with an overall profit margin, 3. The contracts are performed concurrently or in a continuous sequence. CONTRACT REVENUE Contract revenue is measured at the fair value of the consideration received or enue is affected by a variety of The measurement of contract te 1 that depend on the outcome of future events. The estimates often needwr 12 Long-lerm Construction Contracr ved, Therefore, the amount of and uncertainties ar eso ooo id od to the next. aT wi decrease from one ‘contract revenue may incr be effected by variation or change order, Which ig an fora change in the scope of the work to be performed jon may lead to an increase or a decrease in contract Revision of estimate instruction by the cus under the contact. A revenue. Wi ders are modifications of an original contract that es nn, ce ne ons eg ‘contractor or by the cust they include changes in spec ‘method or manner of performance, faci If the contract price is changed as a re ‘made with the revised expected revenue and any ant «arise because of the change order. period and the revenue may be increased by the same amount. CONTRACT COSTS Contract costs shall comprise: 1, Costs that relate directly to the specific contract, bor costs; costs of materials used in construction; and from the Plant and equipment; costs of design and technical ‘oie othe contract; estimated costs of rectification and guarantee Work reen& expected warranty costs; and claims from third parties. These COS trreowe Mle nee eae that is not included in contract - from sale of surph ri - of plant tndeuipment at tice ote uP matrls an tho disposal of 2. Costs that are attrib {the contact SDI 19 contac activity in general and can be allocated eg 12- Lng tm Contre cone eee systematic and rational intlyto all costs having similar characteristics. 3. Other costs that are specifically Orie come i ly chargeable to the customer under the terms costs and development rms ofthe contract. Costs that cannot be attributed to contract activity or cannot be allocated to @ contract are excluded from costs of construction contract. Examples of such costs are 1. Selling and marketing costs General and_administrative costs for which the reimbursement is. not specified in the contract. 3. Research and development costs for which the reimbursement is not specified in the contract 4, Depreciation on idle plant and equipment whose use cannot be attributed to ‘any construction contract, In case of costs incurred in securing the contract (pre-contract costs), these are reliably, and it is probabl once such pre-contract costs be reinstated once the contract RECOGNITION OF CONTRACT REVENUE AND EXPENSES on contract can be estimated When the outeome of a consustion contact can be exinatd revenue and contract cos ‘ever, as the outcome of the contract ized. The following methods are usedCOStS OVer the Tonact revenue for the contract is recognized as an expeye Inmedaely owe hat Conpleted Contact method isnot permited eae, Pas!) Cost Recor the construction contract cannot 1 eee ized only to the extent of red and contract rhich they are recognized in an of the percentage costs shall be recognized as an incurred. In other words, under amount equal to ‘of completion are ‘MEASURING THE PERCENTAGE OF COMPLETION Er rset, various procedures are used to measure the extent of progress toward omletion under the percentage of completion method. They ean be conveniently ‘ovped nto two categories namely: 1.) Input Measures; and ",) Output Measures. Input Measures Input measures are mad are based on an establ C0sts or efforts devoted to a contract. They imed relationship between a unit of input and 5 used cost-1o-cost method, which is based on Unit of input and productivity, ip between a: Under the cost-o-cost " Ht method, the degree of coy eee incurred with the ‘Most recent oa lates is eppleg Bet The percentage hag stim ‘is applied to the expected net in, ee OMe on the project in caper 12 = Long-term Construction Conracts a ‘pus, either revenue and/or profit to be recognized in the current period ermined by the Following, formula: ae todate Expected Revenue recognized thisyear = Totalexpected cost” x profit > in previous year ir should be pointed out thet under the cst-t-cast method, the cost percentage is computed by dividing cumulative actual cost incurred by the total expected sone ‘Output Measures Output methods are made in terms of results achieved. Included inthis category are methods based on units produced, contract milestones reached, and values added, Thus, the measure of completion may be the ratio of the units produced to the total units in contract. LOSS MAKING CONTRACTS Period of the contract. This means that when a loss has been identified, there is no need to estimate the contract's tage of completion CHANGES IN ESTIMATESCCOUNTING FOR SMALL AND MEDIUM-SIZED ENTITIES (SMp,) A 1 be applied in acco tion contracts nstruction, ion contract or to a group fone reflect the su contact oF & group of contrac et ih the full IERS/PERS for construction contracts, the necessary to apply this secti en of a construction contract can be estimated reliably, an en Me eae se ssn onc sxpenses respectively by reference to stage of completion of the end of the reporting period, often referred to as the the stage of completion, future costs review and when necessary, revise the estimates of revenue and costs as the service transaction or construction contract progresses. ‘An entity shall determine the stage of completion of a transaction or contract using the method that measures most reliably the work performed, which include: ‘* The proportion that costs incurred for work performed to date bear to the ‘estimated total costs. 4 3 © Surveys of work performed. ‘+ Completion of a physical proportion of the service transaction or contract the transaction ot probable thatthe ‘When the outcome ofthe construction contract cannot be estimated reliably: © An ent recognize revenue only to the extent of contract c0s!s s probable wil be recoverable; and ‘aga {ecognize contrat costs as an expense in the period in whith -xoeed total contract revenue on a bbe recognized as an expense ‘an onerous contract. expense rather than(Chapter 12— Long-term Construction Contact NS. ¢. Such other costs th , MULTIPLE CHOICE QUESTIO! i ofthe conte ‘administration costs tract, i geable to the customer under for which reimbursement is not specified PROB. 12-1 (AICPA) i bu Builders Construction Corp. signed a contract f0 ° cover a period of two year and with this ¢ contract years. Both contacts are premio to each other. The two contracts should be PROB. 12-4 (PAS) ‘The measurement of contract revenue is affected by a vatiety of uncertainties i i that depend on the outcome ‘ y Combined and treated asa single contract. events, Which statement is incorrect? Th Segmented and considered as two separate contracts, a. A contractor and a cust agree on variations and claims that ¢.__ Revognized under the completed contract method. increase or decrease contract Treated differently. The building under the completed contract method b. The amount of revenue * and the maintenance contract under the percentage of completion a result of cost escalat oath c, The amount of rever cTease asa result of penalties arising from delays caused by the contractor in the completion of the contract. 4. When a fixed price contract involves a fixed price PROB. 12-2 GFRS) : cntract revenue increases as the number of units “The Hoghean Co. isa constructcn company that has the following costs on i cae wo See PROB, 12-5 (PAS) in construction contract comprise amount of revenue agreed in the contract only ‘contract work, claims andi payment only. ial amount of revenue agreed in the contract, variation in -work, claim and incentive payment. ial amount of revenue agreed in the contract and progress PROB. 12- 6 (IFRS) ‘The Donovan Co. is nearing completion of not gone to plan due to the issues outlined a 1. The client has requested variati contract by requiring new security devices to be fited, at an additional cost to Donovan of 1,000,000. The client has accepted responsibility for these additional eral and can be ‘costs even though they were not originally agreed. tion contract. The work has the following, except relate to the sf . Costs that are anributabe to con allocated tothe contract,Chaper 2 = tesa ce Go ames oen es : a1 work on the contract as there nag 2. Donovan has cari out ENE) 599,000 and the client refuses yn teen bul ‘ accept respon of the abov Constution Conrats? ve jasues should be included in contract reveny, coring 10 struction Contracts, which of the following projects According 1 IA shoal be azounted fr as a constuction contract? ‘2. An item of plant and machinery being constructed to be sold as inventory ‘ b. Anoffice block being constructed as an investment property. sown use party under a specifically PROB. 12-8 (IFRS) The Palace Co, bul a factory fo ion company, has December 31 year end. It is to has scheduled its work as follows: March 20, 2016 April 25, 2016 November 27, 2016 Contract to be awarded and signed. ‘Construction work to commence. construction work to be completed. -ompletion of contract. Construction Contracts, the maximum. expected ibutable to the contract should accumulated is iber 30, 2016 , 2016 to November 27, 2016 ta December 30, 2016 to November 27, 2016 PROB. 12-9 (IFRS) Under IAS costs on a fi loss should be s, when itis probable that total contract "ceed total contract revenue, the expected ing contractor has a contract fo construct a large 9g. It is estimated Iding will take 2 ye 188 will be sent to lowing describes the deferred expense. b. Progress billings as income, construction in progr c._ Net, as current asset if debit balance and currentPROB. 12-12 (Financial Accounting by Deegan) ‘The percentage of completion method that may be used t0 account fo, construction contracts ean be justified on the basis that: a, The contractor jects, payments are made ‘of the contract allowing revenue to be PROB. 12-14 (PAS) Percentage of completion of a construction contract is based on all of the wing, except 1 proportion tat contrat costs incurred for work performed to date bear tothe estimated total contract costs, b. Survey of work performed, jamPeton of a physical proportion ofthe contract work. “OBES Payments and advances eceived from customers. be continuously working and therefore earning s for determin Sf services are spe ically referred to in Cost incurred to date as a percentage of transaction, imated total costs of the 2. Advances received to date as a percentage ofthe total amount receivable. 3. Survey of work performed, 4, Revenue to date divided by total contract revenue, a. Methods 1 and 2 b. Methods 1 and 3 ¢. Methods 1 and 4 d. Methods 3 and 4 PROB. 12 - 16 (AICPA) includes the ratio of a. Total costs incurred to date to total PROB. 12 - 17 (AICPA) ion method of accounting for a 4-year A company se the eee ng items shouldbe use to cause i hich of the construction contract. W! - the income recognized inthe sooond0_____— Income previously _reognized _ Yes No = PROB. 12-18 (AICPA) a Yes Yes b Yes No ‘ No No 4. No Yes PROB. 12 ~ 19 (Adapted) In accounting for a long-term construction contract using the percentage of ‘completion method, the progress billings on contract account is 2. Contra current asset account. set account, account, b @ PROB. 12-20 (Financial Accounting by Deegan) Constructions Contracts, sp outcome of a con: treatment specified is: ‘struction contract cannot be reliably assessed. The ecifies the accounting treatment in the case re re : recovered in the ont Where it isnot probable thatthe costs sts will be PROB. 12-21 (Adapted) During 2016, Lynx Co. began construction ofa project scheduled for completion in 2018. At December 31, 2016, an completion. What would be the effect of the project in 2 ‘under the percentage of completion method and the zero profit method. Percentage of completion Zero a No effect No effect, b. No effect Decrease a Decrease No effect 4 Decrease Decrease PROB. 12-22 (AICPA) would be used in the esleultion of the income any nal year of a consrtion contract which tage of completion med? rain Income previously ‘Actual total costs __recognized _ Which of the fol recognized in th accounted for us Conractprice _Acualilents sng neve ie, Ye b YesPROB. 12-23 (IFRS) rice construction contract to by fe AD and the estimated eas ist year, Tiger can estimate the outcome of the the value of P8,600,000 ang ear, What amount should be is, according to IAS |), “The Tiger Co. has entered into 5 recognized as revenue in the financial Construction Contracts? ‘a. 3,200,000 b. 7,500,000 ©. 6,000,000 d. 8,600,000 PROB. 12-24 (IFRS) The Thing Co. has just completed a 4-year contract to which the following relate: Labor and materials costs 1,800,000 600,000 100,000 Disposal proceeds of machinery 0,000 vas Fe ie oa ‘contract costs, according to IAS 11, Construction Contract? b. 1,900,000 «. 2,450,000 4. 2,500,000 chapter 12 Long-term Construction Contracts = 3 pROB. 12-25 (AICPA) Ine, has consisten tly used the ‘ Percentage of completion method of oo cone gots: During 2016, Cord started work on a acco 2d shen ent 8 opie in OR Con December 31 z 2016 2017 Cumulative contract costs incurred “95,900,000 ~P6,300,000 Estimated total cost at completion 7,800,000 8,100,000 How much income would Cord have rec is 0 . ended December 31, 2017 Meee natn creme ‘a. 100,000 b. 300,000 ©. 600,000 4. 700,000 PROB. 12-26 (AICPA) Mill Construction Co. uses the percentage of completion method of accounting. During 2016, Mill contracted to build an apartment complex for Drew for 20,000,000. Mill estimated that total costs would amount to PI the period of construction. In connection with 2,000,000 of construction cost during 2016. 3,000,000 from Drew in 2016, What amount sh a, b. e d. 600,000 PROB, 12-27 (AICPA) ‘The following data relate to a consruction job started by Worthington Co. during 2016:Chapter 12 — Long-term Construction Contract a ma Raa RTE nh Got P 300,009 “otal contract price Cost incurred 1or51/2017 uring 2016 60,0 Atul cos non ea 12000 Estimated cost to complete PaO: Bille to customer during 2016 ee For the years 2016 and 2017, F Received from customer during 000 2016 Under the percentage of completion method, how much should Weithingty rea recognize as goss profit for 2016? ©. 270-000 ane 4. 270,000 B40, © 80,000 4 100,000 PROB. 12-30 (AICPA) High Rise Corp. has entered into a very profitable fixed-price contract for PROB. 12-28 (AICPA) constmistng & eadors ye eaeeed C& J Construction, Ine. consistently used the percentage of completion methed tract during the first year of construction: come. Last year C & J started work on a P4,500,000 ‘contract during the first year of onstruction: which was completed this year. The accounting records Rit Site labor costs P 1,650,000 1,350,000 Depreciation ofthe plant 1,050,000 ‘Marketing costs for se Estimated cost to complete 2,700,000 ready for occupancy How much revenue should C & J recognize on this contract last year? ‘What is the percentage of completion of his contract? Sag 5000 a 3318% b. 150,000 b 2% ©. 300,000 c. 25% 4 350,000 a. 39% PROB. 12-29 (AICPA) PROB. 12-31 (AICPA) Excel ing and has signed a fixed-price two-year Co, a construction com ation i oe tig te te company, uses the percentage of compl ine the following frethod. In 2016, Excellent began work on a contract to construct an office contract for P21 mi building for PI, 100,000 and it was completed in 2017, Data on the cost are: contract by the end ofChapt = vo 8 SIUM Conragy Materials Labor Construction overhead Marke | Depreciation of ide plant and equipment ‘At the end of Year+ it has estimated cost to complete the contract at pp nillion. What profit or loss from the contract should Build-It recognize atthe PROB. 12-32 (AICPA) The following data pertains to Pell Co.’s construction jobs, which commenced during 2016 Project _1 Project 2 Contract price P 420,000 ~ P 300,000 Cost incurred during 2016 240,000 280,000 120,000 40,000 ing 2016 150,000 270,000 Received from customers during 2016 90,000 250,000 1f Pell used the percentage of completion method, what amount of gross profit *port in its 2016 income statement? Chapter 12 Long-term Consrucon Conract PROB. 12-33 (AICPA) State Co. recognizes revenue and e i method. During 2016» agar 22 ig the percentage of com through 2017. Information onthe pr : Receivable from construction smn contract Consiuction expenses ome "192000 368,000 420,000 Profit recognized from the long-ter ction contract in vo iad 'gterm construction contract in 2017 should be b. 108,000 ce. 128,000 4. * 228,000 PROB. 12-34 (AICPA) In 2016, Aldaus Corp. began construction work under a three-year contract. The is P8,000,000. Aldaus used the percentage of completion method purposes. The income to be recognized each year is ‘based on the proportion of the cost incurred to total estimated costs for completing the contract. The financial presentations relating to this contract at December 31, 2016, appeat below: Balance Sheet Receivable - construction contrac billings P 150,000 Construction in progress 50000 Less contract billings = = pleted contract in excess ae Income Statement P 100,000 Income (before tax) onthe contact recognized in Year|pe ONSTHCON Conacy oe in 2016 on this contract? cash as colt vores b. 350,000 e700 500.000 PROB. 12-35(AICPA) Shepard Construction Co. has con: ly used the percentage of completion pard be ‘work on a P3,000,000 construction imated cost of construction was progress of the contract. Income recognized at December 31, 2016 P 300,000 Cost incurred, January 10, 2016 through Dec. 31, 2017 1,800,000 Estimated cost to complete at December 31, 2017 600,000 How much income should Shepard recognize for the year ended December 31, 20177 450,000 PROB. 12-36 (AICPA) Jessup Construction, Inc, has consistent i a istently used the percentage of completion peta of eegeniting income. During 2016, Jessup ‘started work on 4 A -price tic in i ae mare construction contract. The accounting records disclosed the year ended December 31, 2016: Cost incurred Estimated cost to P 465,000 Progress billings 1,085,000 Collections 550,000 350,000 Chapter 12 — Longeterm Consiruction Cot, How much loss should Jessu 2 15,000 b. 35,000 c. —_ 50,000 4. 115,000 iP have recognized in 20162 PROB. 12-37 (RPCPA) Black Builders Co. isa construction firm that uses the percentage of completion recognizing income, On August 2, 2016, a contract to build an office um was obtained at a price of 8,700,000. Below are the data to this contract: 2017 Estimated cost at completion 6,960,000 ‘Cumulative income recognized 1,044,000, Percentage of completion 65% Based on the above information, what is the amount cost of contract incurred during the year ended December 31, 2017? a. 3,741,000 b. 000 4,176,000 d. 3,545,250 PROB. 12-38 (AICPA) (On May 1, 2016, Green Construction Co. entered into a fixed price contract to construct an apartment building for P3,000,000. Green appropriately aceounts centage of completion method. Information lows: 20% 60% Percentage of completion Estimated cost at completion 2,250,000 2,400,000 Income recognized (cumulative) 150,000 "360,000(Chapter 12 — Long-term Construction Comracts isi 4. The initial amount of revenue agreed in the contract PROB. 12- 41 (IFRS) Co, started work on three job sites during the current total revenue on a contract to build a year. Data relating tothe thre jobs are given below: 3 are in accordance with IAS 11, tified the following: std. Billings Initially agreed fixed contract 800,000 Contact Cost coat to on Variation in the contrast (Note !) 100,000 Sie rice _incured_ _complete_ _contract Penalty (Note 2) 30,000 Batangas 300.000 ~375,000 $0,000 Laguna 700,000 100,000 400,000 100 Note 1: During the contract, Aster changed the specification of the air ‘SnFemando 250,000 100,000 100,000 0 condin ine i sts systems. The changed specification has been agreed but with the new price has not yet been signed, although 4% What amount of income should be reported for the current year if the 4 00 percentage of completion method is used for all contracts? te increase inthe contact pce of eound PIO0000 is hSiy oes prota © 2t2000 Note2: A sue a Pin cased a ay fr which te penalty in the iia a. 2anaeo ccontract was P30,000. This was agreed by both parties. . What would be the amo ‘At what amount should the total contract revenue be stated? unt of Construction in Progress to be reported on the Piety balance sheet ifthe percentage of completion method is used? % 900,000 165,000 & 39000 b. 265,000 & $00,000 © 575,000 L870, 4. 765,000 PROB. 12-42 (RPCPA) PROB. 12-40 (PAS) ilders, Inc. entered into 8 P10,000,000 contract to construct a mult- ae aeectient lige Th etme cnt to ieplts s Fecee ie 8,000,000 and the contract period was 36 months staring January 1, 2015. The company uses the cost-to-cost method of estimating earings. On January 1, ‘A variation ina eonstructia on contracts 4 An instruction by the custome Performed under the contact" H#PEE In the seope of work to beter 12 Long-term Construction Contra, ed to P9,500,000 due to many changes a ds relating otis Conta the loin: enema 2,800,090 4,000,000 2,700,000 ere canter recognized for the year ended PROB. 12 - 43 (Adapted) [rte Fix It Construction Co, was the low bidder on an express Way con Kennon Road. The contract bid was P2 i id was P200,000,000. Fix it estimates 1 take 36 months fron oa eS folowing. "2017 te compete the project. Th contract provided forthe * 8% mobilization fee pay i ‘mobilization fee payable ‘within 10 days from the signing of the © Asapn forthe national be. government, 10% of the progress construction, 'M"*4 and is paid upon final acceptance of the Chapter 12 Longe-term Consiruction Contracts a3 . By the end of 2017, '30% completion of the I government accepted presented, except one for accepted on January of th ig year. With the exeeption accepted which was due January of the following year, all, Were settled the amount of profit realized from the project 50,000,000, 25,000,000 20,000,000 15,000,000 20177 the total emount of cash collected by Fix It from this project in a. 90,000,000 b. 80,000,000 c. 77,000,000 4. 92,800,000 PROB. 12-44 (Adapted) A Tum-Key contract was perfected between Built 100, The estimated the percentage of completion method, what is the amount of tt ernie 16 A 118,000 125,000 200,000of completion method, what is the balance Using the pen oF cout tat should be presented at Deveng.” construction in prowres seroone balance shee? “10,000 b. $90,000 é 708,000 944,000 PROB, 12-45 (Adapted) ‘Atlas Construction Co. has used the costto-cost percentage method of , recognizing revenue. The following incomplete records were provided for a recently completed building project. ge oaoise ee Sag ce de oni7 Contract price P20,000,000 Gross profit (loss) 400,000 -—-P'1,400,000-——P (200,000) Cost incurred 3,600,000 ? 8,200,000 How much cost was incurred in 20162 a 18,400,000 300,000 300,000 1,600,000 wa percentage (rounded) of the project was completed by the end of hat was the estimated co: 3,060, to complete the project at the end of 2016? eed PROB. 12-46 (AICPA) Lake Construction Co. uses the percentage of com 7,000,000, on which 600, years. Information for the current is as flores urred through current year P 5,000,000 Estimated cost remaining at the end of eurent year 2,800,000 ‘What is the loss that Lake should recognize in the current year a. 600,000 oe b. 800,000 ©. 1,400,000 d 0 PROB. 12 ~ 47 (AICPA) Land Construction Co. has consistently used the percentage of comy ‘method of recognizing income. During 2015, fixed-price construct which was completed in 2018. The acco records disclosed the following data: Cumulative contract Estimated costs costs incurred at completion 5,000,000 5,500,000 At December 31, 2017 6,000,000, How much income should Land have recognized on this contract for the year ended December 31, 2017? a. 250,000 b. 416,667 ©. $00,000 4. 562,500SHE tr UCtION Contry, a6 PROB. 12-48 (AICPA) 1 Co. uses the percentage of completion meth me male, ‘Adams contracted to build an apartment ioe i "000,000, Adams estimated that total jod of construction. In conné seed 1,000,000 of construction costs du "500,000 from Roper in 2016. How much gro recognize in 2016? 300,000 a b, ¢ d 125,000 PROB. 12-49 (Adapted) On January 3, 2016, Erectors, Inc. enters into a contract to construct a dam for 80,000,000. Erectors uses the cost-to-cost method to determine the percentage al contract was modified . The following schedule Original contract Change order No, 1 ‘Change order No. 2 B a Change order No. 3 600,000 , ‘Negotiable Change order No. 4 250,000 - ie o.oo & Whats i is proje via ercentage of completion for ths project in 2016? b. 23% ©. 25% 4. 30% erm Construction Contracts 67 the amount OF etmated gross profi that will be recognized in 450,000 0 4. 3,462,500 PROB. 12~50 (Adapted) In 2016, Erector Construction Co, i started construction of a building with a Gontract price of P100,00,000 and estimated total costs of 90,000,000. In 2016, Erector incued conscion cs in the amount of P54,000,000. Using, er of accounting, what is the amount of revenue recognized in 2016? Regt eee ee ks PROB. 12-51 (SME) IERS/PERS for SMEs, Section 23, Revenue, provides the conditions that when a contract covers a number of assets, the construction of each assets shall be treated as a separate construction contract, except Separate proposal have been submitted for each asset. “The price of the asset is negotiated without regard to the original contract price. ‘The cost and revenue of each asset are separately identifiable. Each asset has been subject to separate negotiation and both Tors and customer were able to acceptor reject that pat of the ating t each assetChapter 12— Long-term Constrcton Compas, chop 12 = Longs Cones Comay oo... = PROB. 12-52 (SME) wa ae _Aetonding to TFRS/PFRS for SMES, Section 2 even hen he cue ‘AND ~ veion contact cannot reliably, it should recognize rte! ne aoneding an egal amount of venue fr each work performed, e oe ny eing th pereentage of completion method based on Costs incur PROB. ered ot) Cn oc ares mated costs. answer oS Si i earns Note that both «._ Sunaht ine over the life ofthe construction contract. imerelaed ah te ia ra ce ct nd cll : treated as a single contract. Only tothe extent of the expenses recoverable. PROB. 12-2 Suggested answer (d) Cost (1), 2), and (3) According to JAS 11, Construction Contracts, contract costs should include the costs that directly relae to a contract, for example, costs of materials used in the construction, site labor costs, the cost of hiring eq depreciation of equipment used in the contract. In addition, contract costs are identified as being specifically recoverable under a particular contract, these should also form part ofthe construction costs of that contract PROB, 12-3 Suggested answer (@ General administration costs for which ‘reimbursement is not specified in the contract. in recoverable under a particular contract, idemified as being specially recov r anor oud algo form part ofthe consraction cass ofthat contract. Q nit of revenue may increase as a result PROB, 12-4 Suggested answer f; 7 a Ee x er ae 4 actor the completion of the contract. clays bby the contractor will reduce the ising from dels causedhap 12 = Long-term Construction Conran a mount of revenue agreed in PROB. 12-5 Sigersed ore variation tn contract work claim = payment. ince) Contract revenue isthe total amount of conside contract. It includes revenue de from the ori rom any subsequent changes (variations)in 1 ‘have been agreed (.e, the amounts are known and are recoverable). Inthe early stages of a con ntract revenue will often be an estimate of what the final amo as it may be PROB. 12 -6 Suggested answer (b) Issue (1) only In case of variation in the contract, the standard provide only be included as contract revenue when it is probable accept them. PROB. 12 -7 Suggested answer (d) a large boat being constructed for a third party under a specifically negotiated contract According 10 IAS 11, Coy ‘construction contract ‘ontracis, the boat would be 4 wider a specifically negotiate ‘peor De aie ck and the warel should be accounted under IAS i Property, Plant and Equipment. Whil ‘machinery should be mei Pp oe ci PROB. 12- 12-8 Suggested answer (a) March 20,2016 o December 30, 2016 Chapter 12— Long-term Consracion Conpang lon conract rei rom stcaring cat Pegs cots aca cr he pred "1% contrac tonal competion ofthe conten PROB. 12-9 Suggested answer (4) Recognized as an lately {AS 1, Consiructon Conract, provides that loss should be recognized immediately as expense and there is no need to estimate the contract's eae 4 need to estimate the contract's stage PROB. 12 ~10 Suggested answer (b) As progress is made toward completion ofthe contract, There are two methods wed for revenue recognition for long-term Construction contracts: 1) the percentage of completion method, and 2) the zero profit method. Under the percentage of completion method, revenues ‘and gross profit ae recognized each period based upon the progress ofthe contraction The pent at the pecans of completion ‘approach shall be used when the outcome of a construction contract can estimated reliably; while the zero profit method shall be used only when the ‘outcome of the contract cannot be estimated reliably. . ed nove () Ne sa crrent eset If debt alee and pena ee ‘current liability if credit balance. ; requires thatthe difference for Long Term Construction Contacts req Tee cores: ep ge ee ee oe Billings 10 date be shown os © Oi lity is billings exceed ‘Progress ee ‘total billings, and as curr ity ae ene Progress rete. Spare recon requ construction in PROB, 12-12 Suggested rowerChapter 12 = Long-term Construction Conn Ses Included In order 10a in costs ncured seme Basis or standard for Meas performed orto be perorna gi, OMY costs that reflect services ‘interim dates, ‘such as the transaction, re included in the periclar timated total costs of PROB. 12-13 Suggested answer (D B12 = 16 Suggested ans econ 11411. prtaps 2, the percentage of completion matigg FRO! egested answer (a) Total costs incurred to date to total estimated decorns 1 ona fedeprice contract when all of the following condition ost ne ste — The percentage of completion method provi venue canbe measured rliab based on the elon ened roe forthe recognition of income - ae te economic benefits associated with the contact costs for completion of the contrac The nora of heome for rd ten Clemeted. 2 act unt of income for third year is ons ro complete the contract and the stage of contract 4s follows: the total anticipated income (based on the latest mated costs) is multiplied by the ratio of costs incurred to date available total estimated costs, andthe ed ae Product is reduced by ‘end of the reporting period can be measured reliably 4. The contract costs attributed to the contract can be clearly identified ‘and measured reliably so that actual costs incurred can be compared with prior estimates. PROB. 12 - 17 Suggested answer (o) Yes, No PROB. 12-14 Suggested answer (d) Progress payments and advances received from cone The percentage of completion method provides for the recognition of income based on the relationship between the costs incurred to date and estimated Under the percentage of completion method, revenue and expenses are total costs for the completion of the contract. : recognized to the extent that construction has progress. Progress payments The amount of income (based on the latest available estimated costs) ‘and advances received from customers do not reflect the work performed. recognized in the second year ofa 4-year contract is calculated as follows: the total anticipated income is multiplied by the ratio of the costs incurred to date to the total estimated costs, and the product is reduced by previously PR recognized income. Income previously recognized is therefore used to 'OB. 12-15 Suggested answer (b) Methods I and 3 valenlate income to be recognized inthe second year. However, progress Billings to date have no effect onthe anoint of income to be recognized in According 0 ing to IAS 18, Revenue, the stage of completion of a transaction may be the second year. determined by iet i serene a variety of methods. dn entity uses the method that menses the methods may ie Performed. Depending on the nature of the transaction i : —- of work performed. PROB, 12-18 Suggested answer () No. No irae 40 date as a percentage of total services 10 b ples permit revenue to be recognized when itis A Pepin fas Revenue recognition Prim] eared. For long-term construction contracts, Othe pone ts incurred 10 date Bear tothe estimated total e288 realized or realizable om cordance with either the percentage of iy costs that reflect services performed to date a* these criteria arecontract method. Neither = "peas results recognition of peo sea? tions of cash results in incon’ billings or the progres mop, 12-1 Saggeied ener (0) COMPA CUTEN SE OCA sion inde _oP Jn conse generally exceed one year. The Sir conracerelted assets 2 the construction in progress (CIE PROB. 12-20 Suggested answer (c) Where the outcome of a construction contract cannot be estimated reliably or where the stage of completion cannot be reliably assessed, costs incurred ‘on the contract are 10 be recognized as expense and revenue is to be recognized only to the extent that the cost incurred are recoverable. PROB. 12-21 Suggested answer (d) Decrease, Decrease When the current estimate to immediate provision for the ent ‘method, Th, under either met the projected los. il contract costs indicates a loss, an loss should be made regardless of 2014 operating income is decreased by PROB. 12-22 Suggested answer (b) Yes, Yes, Yes C ; OF a magic I the revenue in the construction contract, In the final year percentage ofoomenined by the pereentage of completion method. the ‘8 of completion is 100%, since the costs to date equal total cost. Therefore, to e should be de less the actu 20,000,000 31.5% 7,500,000 The standard permits contract revenue to be recognized on the basis of cost incured a @ percentage of ttl etna cae a tage o completion method. ae ae ome ganas ae 1,800,000 600,000 isposal proceeds of machinery Total contract costs include the costs that directly ls used in ! equipment and contract costs ‘contract activity in general, for example, insurance and construction overhead. If other costs are identified as being specifically recoveral tinder a particular contact, these should also form part of the construction costs of that contract.Chapter 12 Langcterm Construction Contracy, m Constrction Contracy hap 12— Longe Contin Conan 000 vied answer (2) P1004 Contract pice ROB, 12-255ugerel 2016 2017 rad mated cos (P60.00 + 120,900) _° 300008 — 000+ 12,00 73,000000" P3000 ree ate Contract price 7,800,000 8,100,000 See Of completion i eas total estimated cost 1,200,000 900,009 Groet i pO! (6,000 + 120,003) 2310% Estimate eens of completion s : Profitto be recognized for 2016 E40.000 iply 50% 000) PAS 11, Construction Cc . Non na lon Contracts, provides tha the recognition of revene by —wo,000 ——r00,005- Percentage of oak emetin ofa conan efared ote 600,000 Imad th ihe cen Melod. Uner ths method, contract reve eaload revenue incorentyesr —-B600.000° —P190.999 completion resign te repning ool oe ti can ‘be tributed to the proporion of work Completed Penne ee revenue y ative as revenue in the income statement in the counting period in wich te work i posed ie the current period. All i tree, Prof ceded The percentage of completion method requires recognition of contract revenue and profit as work on contract progresses based on expected total ‘profit and estimated progress towards complet that revenue and profit are two different terms. Profit is calculated by ‘related costs are recognized in the period in which they occur. subtracting the construction expenses from revenue; and revenue is the contract price. The stage of completion of a contract may be determined in a variety of PROB. 12-26 Suggested answer (c) PS00,000 ways. The enterprise uses the method that measures reliably the work . performed. Depending on the nature of the contract, the methods may ‘Contract price P 20,000,000 include: Less total estimated cost 16,000,000 1L) the proportion that contract incurred for work performed to Estimated revenue —~4,000,000- date bear to the estimated total contract costs; 2.) survey's of work performed: and 125% 4, completion ofa physical proportion of the contract work. Eeaioom Progress payments and advances received from customer often do not s , * prmed. When the stage of completion is determi eon prone of open mtd egies econ of Tuc te mat pes Fn ey ces Str i Profit as work on contract rsses based on aN cluded in costs incurrec te. SDA tl raf end xine propre at Een that reflec work performed are ined n cot cured o date aa ‘period. A} ed cosis are recognized in the period in which they PROB. 12 - 28 Suggested answer (b) P1S0,000 PROB. 12-27 Suggested answer (b) Pap 000term Construction Contracry term Conesruetion Contracts a rac price 4,500,000 cont cesta einated cme ieee pes sono Multiply by percentage of completion ‘ 1(1,350,000/4,050,000) 3% Realized revenue (last year) Fix 000 method requires recognition of contract sed on expected total proft and revenue and turing const ion based on expecte PD re dearas towards completion inthe current period. PROB.12-29 Suggested answer (¢) 270,000 160,000 2016 2017 Contract price 1,100,000 1,100,000 Less total estimated cost (90,000+260,000) 650,000 (630,000+280,000) 670,000 Gross profit . 450,000 430,000 Multiply by percentage of completion £90,000/(390,000+260,000)} 60% Realized =aRzO MOS ae lized revenue to date 270,000 430,000 ‘Les rela revenue in prior years) __ 270,000. lized revenue in current year. 370,000" 760,000 No ec ee ured provided ae as ofa given date, therefore nO! {deemed compleedin 207, ted 28 0 complete in 2017, the pret PROB. 12-30 Suggested answer (a) 33 139g (Chapter 12 — Long-term Construction Conrats Materials Site labor costs cn Agreed a ive costs to be reimbursed, a Depreciation lant used for the construction _0.5 million Total cost incurred 6.0 million Divide by total estimated cost ic Percentage of completion Construction contract casts shall consist of cost that relate directly to the specific contract (e.g, materials, labor, etc); costs that are attributable to contract activity in general and can be allocated to contracts (eg, insurance, ete); and other costs that are specifically chargeable under the terms of the contract (eg, reimbursable development, general and administrative costs). Selling and market contract costs because they cannot be ai allocated to a contract. PROB. 12-31 Suggested answer (a) 1.5 million Materials Labor Construction overhead Total cost incurred Contract price stimated cost (9 carketing costs, as well aS, depreciation of idle plant and de ng ‘not included in the comract costs PROB, 12-32 Suggested answer (8) P20,000Project 2 P00 320,000 P 20,000) PROB. 12-33 Suggested answer (a) P50,000 2016 2017 Construction in progress P122,000 ~_P364,000 Less construction expe 105,000 __ 297,000. 17,000 67,000 recognized in prior years Profit recognized this year. ” 12- Lom. tn Con ts 651 in progress accoun the difference ts the profit recognized to 470,000 ion contract 150,000 520,000 ‘he contractor andl payments ‘and the completed contract specified by the contract terms and may be is actually ‘incurred. As a protection forthe customer, the contract frequently provides for an amount t0 be retained rom the progress ‘continues (o be reflected in the accounts. PROB. 12-35 Suggested answer (a) P150,000 a ore sam + 600,000), 600,000 Be 1 of completion 18% 750,000 Resid eee 300,000 _ Realized revenue tis year50,000 1,500,000 cost (465,000 + 1,085,000) _1,550,000_ PROB. 4,524,000 978,750. 73,545,250 ‘may be computed by dividing the cost red cost, hence (0 compute for the cost cost must be multiplied by the rence between the cost incurred as of incurred at a given period. 'be0 given periods represents PROB, 12 - 38 Suggested answer (e) P990,000 Chapter 12 — Longeter suction Conta Pe neds ginitieiecsigiin te Cost ineured as of : (60% 2,400 900) "22017 Les os inured Cone el Dnt 3,20 percentage of completion. nd the diferen zen the cost incurred as 0 {wo given periods represen heat cured ata gown porade PROB. 12-39 a ‘Suggested answer (b) P190,000 ° sn Batangss__Laguna__Femando Cost incurred 375,000 P100,000-~ ~P100,000 Cost to complete 0 __ 400,000 100,000 Total estd. cost 7575.00. —PS00.000. _F200,000 % of completion 100% 20% | 50% Sn Total 700,000 ~ 250,000 1,450,000 Batangas _Laguna_ _Femando Contract price 500,000 Less total 200,000. __1,075,000 "30,000 375,000 20% 50%, roo _20% 190,000, resoon, __40,000, __25,000 pletion method requires recognition of contract 1a action Based on expected ttl Prof and revenue and profit dirs vo eon im the current period. All related esi poe pl which hey occur costs Again, the percent in the1b. Suggested answer (0) P265,000 ae : 100,000 Cost incurred 40,000 ‘above compuaations. PROB. 12-40 Suggested answer (a) An instruction by the customer for a change in the scope of work to be performed under the contract. A variation is on instruction by the customer for ‘a chan work to be performed under the contract. t | they have been agre, ie. the amounts are oon we Pre Contract revenue may alter is - tam ge MRT pete conc mae einen @ third party, for costs that were not | PROB. 12-42 a Estd. Cost to complete 5,000,000 1,600,000, - Total estimated cost wovo.coo” ~aon.o0 © ~-sz00.000 entage of completion 375% © 8025% 100% Revenue recognized as of December 31, 2016 ),000.x 80.25%) 7,623,750 Less actual cost incured to date 6,500,000 Estimated profit recognized as of December 31, 2016 Ts.750 Following formula: _Astat Catto dte_12 Long-term construction Contac, ihis method, the degree of completion ready incurred with the most recent The percentage th Note that under 1 the expected ne 0 the sd on the informat i jec ive at earnings to date. Base ‘Provided Ce or a Od a Pecognced as of December 31, 2016, hus, the correct answer is “a” b. Suggested answer (c) P176,250 ice 9,500,000 Less total 8,200,000 Estimated total gross profit 1,300,000 Less profit recognized as cf December 31,2016 __1,123,750 Estimated gross profit recognized in 2017 E_176.250 “The requirement is to determine the estimated gross profit (loss) 10 be recognized for the year ended December 31, 2017. At the year of completion (2017), The total estimated total gross profit based on the revised contract price will be reduced by the estimated gross profit recognized in prior years. ROB, 12-43 Suggested answer (b) 25,000,000 Total estimated gross profit 50,000,000 Multiply by percentage of completion» 50% Realized gross profit in 2017 725,000,000 Under the percentage of completion method, a company ring On a contract as it progresses toward compl ree of reverue 5 hese items until the contract is completed. The ‘Progress toward, Doane ‘each year is based on some measures of b, Suggested answer (4) P92, 800,000 Chapler 12 Long-term Consructon Cora : Serenata ee eT ye Mobilization fee P 10,000,000 100,000,000 10,000,000 90,000,000 7,200,000 __ 82,800,000, Total cash received in 2017 7.92, 800,000 Note that the unaccepted 0%6 of the total billings accepted, and the unsettled is 896 of the: s, thus the above computations. PROB. 12-44 ‘a, Suggested answer (b)P118,000 P 1,200,000 ted cost (590,000 + 410,000) 1,000,000 Estimated goss pit 200,000 Maltily by percentage of completion (590,000 1,000,000) 59% Realized gross profit for 2016 ‘not only the profess npower and needed. When completed, the project will be wee ower to the eustomer, ence the term “turn-key” b, Suggested ansver (¢)P708,000 | P 590,000 Cost inoured 0 date ‘s sooo Profit recognized on project in progress —118,000_ Prof tenant pres, De. 31,2016erm Construction Contracy, accumulation account : account is a cost a COUNE similar Constctim otass account in job order cstig, except that in pereentag, Yeompeton also includes the inerin profit recognized in a period, . 12-45 = ns ‘Suggested answer (c) P6,600,000 Contract price 20,000,000 Less gross profit recognized on contract + 1,400,000 - 200,000) 1,600,000 surred on contract 18,400,000 surred in 2015 and 2017 ,600,000 + 8,200,000) 11,800,000. Cost incurred in 2016 ‘P.6,600,000 The requirement is 10 determine the cost incurred in 2016. Since the information pertains to a recently completed project, the excess of contract price over the gross profit represents the total cost incurred on contract. Given the cost incurred for 2015 and 2017, the balance represents the cost incurred in 2016. b, Suggested answer (b) 60% Total cost incurred and gross profit recognized a the end of 2016: Cost incurred .000 + 6,600,000) Profit (P400,000 + 1,400,000) Divide by contract price Percentage of completion —end of 2016 10,200,000 1,800,000 Piz 00000) 20,000,000. 60% cost-to-cost percentage method, the degree of mates. of toa combaring costs already incurred withthe most Percentage that costs i be ra e complete the The ive at earnings to dale. the gross profit that ‘should be ld be used to compute both revenues and costs, No provided by theron oe Mt Me estimated cost to complete was not And an alternative computation in determi omple tan a termining the percentage of competi under this method is by dividing the tal casts newved sod ant ft recognized by the contract price, as shown above. » c. Suggested answer (b) P6,800,000 Total costs incurred, end of 2016 (b) 10,200,000 Divide by percentage of completion 60%. Total estimated costs on contract, end of 2016 17,000,000, Less total costs incurred, end of 2016 10,200,000, Estimated cost to complete the project, end of 2016 ~ B_6,800,000 One of the most difficult problems in using the cost-to-cost percentage method is estimat costs to be incurred. However, this estimation is required in reporting income, regardless how the percentage of completion is computed. PROB. 1246 Suggested answer (c) P1,400,000 Contract price nan Less total costs (P5,000,000 + 2,800,000) 2g Gross loss 0 Less realized revenue prior years ss a oot Loss in the current year x i + the recognition of which is more In reporting the amicipated contact loses the reopen EG ge complex under the per ‘entire lass in the year from cumulative ‘must be the cumal ‘the cumalative cost to deduct vevenne cannot be te actual cost incurred, but re anticipated loss gzed revenue piste entire anicipated Toss 00 PROB, 12-47 Suggested answer (a) 250Chapter 12 = Lom 60. Contract price Less Estimated total costs Gross profit Percentage of completion 2,750,00015,500,000 “Again, under the pereé revenues and costs on a contract as it pro than deferring recognition of these items until the contract is compl 10,00016,000,000 revenue to date ized revenue prior years venue this year term Construction Contracts 262017 7,500,000 7,500,000 5,500,000 6,000,000 72,000,000 1,500,000 50% 83 113% 7,000,000 1,250,000 1,000,000 250,000, -entage of completion method, a company recognizes rather 1 The ses foward compl ‘amount of revenue to be recognized each year is based on some measures of progress toward completion. PROB, 12-48 Suggested answer (b) 250,000 Contract price Total estimated costs Total gross profit Gross profit 2016 stage of completion in that, PROB. 12-49 ‘Suggested answer (c) 25% 10,000,000 8,000,000 72,000,000 12.5% 250,000 recognized in a given period is the total to be earned in that contract based on the Chapter 12 — Long-term Construction ¢ ‘ntact ost Estd.Cost Total Estd Original contract Cost Change order No, 1 66,050,000 Change order No, 2 covey Change orde 400,000 Change order No.4 nes 10,000 0 000 Divide by tot 67,800,000 Percentage o 25% Change orders are modifications of an change the provision of the contrac. result of a change order, future co ‘expected revenue and any anticipated ‘the change order. b. Suggested answer (@)P3,462,500 ‘Total contract price (P80,000,000 + 250,000 + 1,200,000 + 200.000) ‘Multiply by percentage of om