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# Long Term construction On January 2, 2008, JGG Builders Corp.

of Ilocos enters into a contract to construct a building for P 40,000,000. During the construction period many change orders are made to the original contract. All of the changes were accepted by both the customer and the contractor. The following schedule summarizes the change orders in 2008: Cost Incurred In 2008 8,000,000 50,000 300,000 125,000 Estimated Costs to Complete 28,000,000 50,000 50,000 300,000 Contract Price 40,000,000 125,000 600,000 100,000

Basic Contract Change order # 1 Change order # 2 Change order # 3 Change order # 4

Under the percentage of completion method, what is the gross profit to be recognized on December 31, 2008 (Rounded to the nearest peso)? a. P 907,828 b. P 888,889 c. P 909,063 d. P 970,830

In 2006, Builders agreed to construct a commercial building at a price of P 1,000,000. South Builders uses the percentage of completion method of recognizing revenue on long term construction projects. The data relating to the projects from 2006-2008 are as follows: 2006 280,000 520,000 150,000 120,000 2007 320,000 200,000 400,000 320,000 2008 185,000 1,000,000 940,000

Cost Incurred each year Estimated Cost o complete Billings Date Collection of billings date

What is the amount of gross profit to be recognized in 2007? a. 80,000 b. 78,500 c. 85,000 d. 90,000 Using the above information, what is the balance of construction projects net contract billings account of south builders December 31, 2007 balance sheet? a. 350,000 b. 300,000 c. 550,000 d. 380,000 Using the above information, 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, 2007? a. 200,000 b. 250,000 c. 350,000 d. 300,000 North Construction Company uses the percentage of completion method of recognition gross profit on long term construction contracts. The company started work on the two contracts during 2007. Data relating to the two contracts are given below: Contracts price P 1, 800,000 1, 350,000 Actual cost 12/31/2007 P 450,000 262,500 estimated cost to complete P 450,000 487,500

Contract 1 Contract 2

In 2008, contrast 3 was started for a contract prize of P 2, 700,000. As of December 31, 2008, the following data are available: Actual cost 1/1/07-12/31/08 840,000 540,000 540,000 Estimated Cost to Complete 210,000 360,000 960,000

## Contract 1 Contract 2 Contract 3

How much income is to be recognized in 2008? a. 1,302,000 b. 432,000 c. 642,000 d. 270,000 Using the information above, what is the balance of the construction in progress account as of December 31, 2008? a. 3,222,000 b. 3,942,000 c. 1,920,000 d. 2,562,000

On July 1, 2006, summer construction Corporation contracted to build an office building for JG Inc., Inc. for a total price of 975,000. Data relating to the project from 2006-2008 are as follows: 2006 75,000 675,000 150,000 2007 600,000 400,000 550,000 2008 1,050,000 275,000

## Contract Cost Estimated Cost to complete Billings to JG Inc.

Summer construction corp uses the zero profit method. What is the balance of the construction in progress account net of billings at December 31, 20007? a. P 125,000 due to JG Inc b. P 125,000 due from JG Inc c. P 25,000 due from JG Inc d. P 25,000 due to JG Inc Assuming the use of the Percentage of Construction method, how much is the gross profit (loss) to be recognized in 2007? a. (47,500) b. 47,500 c. (22,500) d. 22,500

West Construction company recognized gross profit of P 31,500 on its long term project what has accumulated costs of P61,250. To finish the project, the company estimates that it has to incur additional cost of P122,500. Billings ,made were 40% of the contract price. What is the balance of the CIP net of billings? a. 18500 liability b. 18,550 asset c. 50,050 asset d. 50,050 liability Marlboro Construction company, Inc. entered into a construction contract in 2007 that called for a contract price of P 9,600,000. At the beginning of 2008, a change order increased the initial contract price by 480,000. The company uses the percentages of completion method. The following data is available: 2007 2008 Cost incurred to date 4,920,000 8,640,000 Estimated cost to complete 4,920,000 2,160,000 What is the gross profit or loss should Marlboro company recognize in 2007 and 2008

a. b.

c. d.

## 2008 (960,000) (720,000)

East Builders works on a 70 million contract in 2008 to construct a shopping mall for SM inc. During 2008, East Builders uses the percentage of completion method of revenue recognition. At December 31, 2008, the account balances are Construction in progress Accounts Receivable Contract Billings Estimated cost to complete 24.55 million 2.4 million 12.0 million 31.85 million

How much is the actual cost incurred in 2008? a. 24.5 million b. 49 million c. 7.5 million d. 17.150 million

From BAYSA Exercise 7-1 In 2006, Durabuilt Engineering entered into an agreement to construct an office building at a contract price of P 50,000,000. Construction data were as follows: 2006 2007 2008 Construction Cost P 7,500,000 P 27,000,000 P 6,300,000 Estimated Cost to complete 30,000,000 8,625,000 Progress Billings 8,000,000 36,000,000 6,000,000 Collection from clients 5, 500,000 33,000,000 11,500,000 Instruction 1. Determine the revenue, cost of revenue and gross profit to be recognized in 2006,20007,20008 using the percentage of completion method and the cost to cost method of estimating the percentage of work completed. 2. Prepare necessary journal entries to record construction activities for each year, including the recognized revenue, cost of revenue and gross profit. 3. For 2007, show how the details related to this construction ciontract would be disclosed on the balance sheet and in the income statement.
2006 P50,000,000 P 7,500,000 30,000,000 37,500,000 P12,500,000 20% To Date P10,000,000 7,500,000 P 2,500,000 P40,000,000 34,500,000 P 5,500,000 P50,000,000 40,800,000 P 9,200,000 2007 P50,000,000 P34,500,000 8,625,000 P43,125,000 P 6,875,000 80% Recognized in prior year/s P10,000,000 7,500,000 P 2,500,000 P40,000,000 34,500,000 P 5,500,000 2008 P50,000,000 P40,800,000 __________ P40,800,000 P 9,200,000 100% To be recognized this year P10,000,000 7,500,000 P 2,500,000 P30,000,000 27,000,000 P 3,000,000 P10,000,000 6,300,000 P 3,700,000

Contract price Cost incurred to date Est. cost to complete Total estimated cost Total estimated gross profit Percentage of completion

2006 - Recognized revenue Cost of revenue Gross profit 2007 - Recognized revenue Cost of revenue Gross profit 2008 - Recognized revenue Cost of revenue Gross profit

## b. Accounts Receivable 8,000,000 Progress Billings on Const. Contracts

8,000,000

36,000,000

6,000,000

c. Cash Accounts Receivable d. Cost of LTCC Construction in Progress Revenue from LTCC

## 11,500,000 11,500,000 6,300,000 3,700,000 10,000,000

e. Progress Billings on
Construction Contracts Construction In Progress 50,000,000 50,000,000

Statement of Financial Position Current Assets: Accounts Receivable Current Liabilities: Progress Billings on Construction Contracts Less Construction in Progress

P5,500,000

P44,000,000 40,000,000

P4,000,000

New Dimension Construction Company bagan operations January 1, 2003: During the year , the company entered into a contract with centurion Company to construct a manufacturing facility. At that time, new dimension estimated that it would take five years to complete the facility at a total cost of P 18,000,000. The total contract price for construction of the facility is P 25,000,000. During the year, the company incurred P 4,400,000 in construction cost related to the construction project. The estimated cost to complete is P 15,600,000. Centurion was billed and paid 30% of the contract price subject to a 10% retention fee. Determine the amount of gross profit for the year ended December 31, 2003. Determine the balance of AR, CIP, Progress Billings on Construction contracts ANSWER 1. Contract price Total estimated cost: Cost incurred to date P 4,400,000 Estimated cost to complete 15,600,000 Total estimated gross profit Percentage of completion ( P 400,000/20,000,000) Gross profit to be recognized in 2008 2. Accounts Receivable Construction in Progress Progress Billings on Construction Contracts P25,000,000

## 20,000,000 P 5,000,000 22% P 1,100,000

(P25,000,000 x 30% x 10%) P 750,000 (P4,400,000 + P1,100,000) P5,500,000 (P25,000,000 x 30%) P7,500,000

You were engaged to AUDIT the books of accounts of MMN contractors which had a 3 year construction contract in 2003 for P9,000,000. MMN uses the percentage of completion method for financial statement purposes recognized for each year is based on the ration of cost incurred to total estimate cost to complete the contract. Data on this contract follows: Accounts receivable-construction contract billings P 300,000 Construction in Progress P 937,500 Less: Account Billed 843,750 10% retention 93,750 Net Income recognized in 2003 ( before tax) 150,000 MMN Contractors maintain a separate bank account for each construction contract. Bank deposits to this contract amounted to P 500,000. 1. How much cash collected on the contract was not yet deposited at December 31, 2003? a. 43,750 b. 1,137,500 c. 193,750 d. 287,500 2. What was the estimated total income before tax on this contract? c. 1,440,000 a. 450,000 b. 840,000

d. 287,500

Answer Key Total amount billed Less Balance of accounts receivable Total collections Amount deposited Cash collected not yet deposited P150,000 937,500/9,000,000 P843,750 300,000 P543,750 500,000 P 43,750 P1,440,000

On September 14, 2003, NNO Contractors, Inc. won the bid for the construction of a 1,000 room hotel for hoteliers, Inc. on the reclamation area for 1.2 billion. On the terms of payment, parties agreed on the following: One percent mobilization fee (deductible for the final bill) payable within fifteen days after signing the contract; Retention of 10% on all billings, payable with the final bill after the acceptance of entire completed project; and Progress billings on construction within seven days from the date of acceptance By the end of 2003, the company presented one progress billings for 10% completion by hoteliers inc. evaluated and accepted on decmebr 28, 2003 for payment on January. The company used percentage of completion method of accounting. In the year 2003 NNO contractors Inc. received a fee of a. 9.8 million b. 10.8 million c. 12 million ANSWER: C

d. 1.2 million

P 1.2M

10.8M P12.0M