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CONSTRUCTION CONTRACTS (SPECIAL REVENUE RECOGNITION)

CONSTRUCTION CONTRACTS (SPECIAL REVENUE RECOGNITION)


PAS 11 –
Two Types of Contract
1. Fixed Price Contract
- negotiated already
- can probably incur loss due to changes in prices
o *cost escalation clause
2. Cost plus Contract
- Certain percentage is the profit
- To be reimbursed

Revenue Recognition and Contract Cost

Contract Revenue – initial contract price / Bid Price


Other Revenue:
- Variation in contract (work is probably accepted)
- Claims/Penalty
- Incentive Payment
o Meeting the standard
o *discretionary to the customer
Contract Cost –
- Cost incurred to date – cumulative cost
- Estimated Cost to complete – anticipated cost
Cost incurred to date
- pre-contract cost – (if separately identifiable)
- after the contract – CAPITALIZABLE
- Cost to cost (input measures) – based on cost incurred to date
- Output measures – based on architect or engineers’ estimation
-

Methods of Recognizing Profit

Percentage of Completion – outcome is reasonably estimated

Zero-Profit/Cost Recovery Method – outcome is NOT reasonably estimated


ILLUSTRATIVE PROBLEMS
Problem 1
In 2018, CABRIA Builders agreed to construct a commercial building at a price of P1,000,000. CABRIA
Builders uses the percentage of completion method. The information relating to the costs and billings
for the contract is as follows:
2018 2019 2020
Cost incurred to date P 280,000 P 600,000 P 785,000
Estimated costs to complete 520,000 200,000 -
Customer billings to date 150,000 400,000 1,000,000
Collection of billings to date 120,000 320,000 940,000

Required:
1. What is the amount of gross profit to be recognized for 2018, 2019, and 2020, respectively?
2. What is the balance of the Construction in Progress, net of Contract Billings account at CABRIA’s
December 31, 2019 balance sheet?
3. Using the same problem, compute for construction revenue to be recognize in 2018, 2019 and
2020, respectively assuming the use of zero-profit method.

Problem 2
CABRIA Mall Builders was recently awarded a P1,120,000 contract to construct a shopping mall for
Jonas Inc. CABRIA Mall Builders estimates it will take 42 months to complete the contract. The
company uses the cost-to-cost method to estimate profits (use two decimal places).

The following information details the actual and estimated costs for the year 2017 to 2020:
Actual cost Estimated cost
each year to complete
2017 P 520,000 P 544,000
2018 264,000 312,000
2019 192,000 152,000
2020 136,000 -

Required:
How much is the realized gross profit (loss) in 2019?

Problem 3
CABRIA Construction Company recognized gross profit of P31,500 on its long-term project which 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. How much is the construction
in progress net of billings? Indicate whether current asset or current liabilities.

Problem 4
Dreamer, Builders Inc. has consistently used the percentage of completion method of accounting for
construction-type contracts. During 2020 Dreamer started work on a P 9,000,000 fixed-price
construction contract that was completed in 2021. Dreamer’s accounting records disclosed the following:
December 31
2020 2021
Cumulative contract costs incurred P 3,900,000 P 6,300,000
Estimated cost to complete 7,800,000 8,100,000

How much income would have recognized on this contract for the year ended December 31, 2021?

Problem 5
State Co. recognizes construction revenue and expenses using the percentage of completion method.
During 2020 a single long-term project was begun, which continued through 2021. Information on the
project follows:
2020 2021
Accounts receivable from construction contract P 100,000 P 300,000
Construction expenses 105,000 192,000
Construction in progress 122,000 364,000
Partial billings on contract 100,000 420,000

Profit recognized from the long-term construction contract in 2021 should be how much?

Problem 6
On April 1, 2021, Gloria Inc. entered into a cost-plus fixed-fee contract an electric generator for Cabrera
Corporation. At the contract date, Gloria estimated that it would take two years to complete the project
at a cost of P 2,000,000. The fixed fee stipulated in the contract is P 300,000. Gloria appropriately
accounts for this contract under the percentage of completion method. During 2021 Gloria incurred costs
of P 700,000 related to the project, and the estimated cost of December 31, 2021, to complete the
contract is P 1,400,000. Cabrera was billed P 500,000 under the contract.

The gross profit to be recognized by Gloria Inc. under the contract on December 31, 2021 is how much?

Problem 7
X Company uses the percentage of completion method of recognizing income. In 2020,
work was started on a P 18,000,000 job completed in 2021. Records in 2020 show the following:
Progress billing P 6,600,000
Cost incurred 5,400,000
Collections 4,200,000
Cost to complete 10,600,000

How much was the gross profit recognized in 2020?


How much is the gross profit to be recognized in 2021?

Problem 8
AAB Construction Company uses the percentage-of-completion method of accounting. In 2020 AAB
began work under contract #1348, which provided for a contract price of P20,000,000. Other details
follows:
2020 2021
Cost incurred during the year P3,000,000 P15,750,000
Estimated costs to complete, as of December 31 12,000,000 -0-
Billing during the year 3,600,000 15,400,000
Collection during the year 2,500,000 15,500,000

The portion of the total contract price to be recognized as revenue in 2020 is how much?

Problem 9
BBC Construction Company uses the percentage-of-completion method of accounting for long term
construction contracts. In 2020, BBC started to erect a building for P10,500,000. The construction
project was completed in 2021.
The following pertinent information were extracted from its accounting records:
2020 2021
Progress billings during the year P3,850,000 P6,650,000
Cost incurred during the year 3,150,000 6,300,000
Collected on billings during the year 2,450,000 8,050,000
Estimated cost to complete the project 6,300,000 -0-
How much income should BBC have recognized on this contract for the year ended 2020?

Problem 10
DJD Builders has a fixed price contract to build a waiting shed. The initial amount of revenue agreed is
Php 528, 000. At the beginning of the contract on January 1, 2018, the initial estimate of the
constructions costs is Php 480, 000. By the end of 2018 the estimate of the total costs has risen to Php
484, 800.
During 2019 the customer agrees to a variation with increases expected revenue from the contract by
Php 12, 000 and causes additional cost of Php 7, 200. At the end of 2019, there were materials stored
on site for use during the following period which cost Php 6, 000.
DJD builders have decided to determine the stage of completion of the contract by calculating the
proportion that contract costs incurred for work to date bear to the latest estimated total contract costs.
The contract costs incurred at the end of the year (cost incurred to date), billings and collections for
each year were as follows:

Year Direct and allocable costs to date Billings Collections


2018 Php 126, 048 Php 144, 000 Php 120, 000
2018 370, 080 (including materials in store) 240, 000 228, 000
2019 492, 000 156, 000 192, 000

Required:
1. Compute the gross profit
a. Using percentage of completion (over-time) – cost-to-cost method
b. Using Cost recovery method (zero-profit) or point in time
2. Compute the due from/to customers
a. Using percentage of completion (over-time) – cost-to-cost method
b. Using Cost recovery method (zero-profit) or point in time

Problem 11
In 2018, Chicago Construction began work on a three-year construction project to build a new
performing arts complex (the “PAC”). The PAC contract price is Php 150 million. Chicago uses
the percentage-of-completion method of accounting. At the end of 2018, the following financial
statement information indicates the results to date for the PAC:
Income statement
Revenue Php ? million
Cost of construction 35 million
Gross profit Php ? million

Balance Sheet
Accounts Receivable from construction building Php 14 million
Construction in Progress Php 50 million
Less: Billings on constructions (? Million)
Net billings in excess of construction in Progress Php ? million

Cash Flow Statement


Cash collections Php 46 million
Required:
Compute the following
1. Total revenue recognized in 2018
2. Billings on construction
3. Net in excess of construction in progress
4. Percentage of completion
5. Estimated remaining cost to complete

Problem 12
On January 1, 2018, Cleveland Enterprises obtained a contract to construct a building. It was
estimated at the beginning of the contract that it would take three years to complete the project
at an expected cost of Php 200, 000. The contract price was Php 250, 000. The following
information describes the status of the job at the close of production each year:
2018 2019 2020
Actual cost incurred Php 110, 000 Php 120, 000 Php 15, 000
Estimated cost to complete 100, 000 20, 000 -0-
Billing on contract 125, 000 125, 000 -0-
Collections on contract 120, 000 120, 000 10, 000
Required: compute the following using. A. percentage of completion. B. cost recovery
1. Revenue recognized during the year
2. Gross profit during the year
3. CIP
4. Progress Billings
5. Net of CIP/Progress billings
MULTIPLE CHOICES PROBLEMS

In 2017, Calix Builders agreed to construct a commercial building at a price of P3,750,000. Calix
Builders uses the percentage of completion method. The information relating to the costs and
billings for the contract were as follows:
2017 2018 2019
Cost incurred to date 1,050,000 2,250,000 2,943,750
Estimated costs to be incurred 1,950,000 750,000 -
Customer billings to date 562,500 1,500,000 3,750,000
Collection of billings to date 450,000 1,200,000 3,525,000
1. How much is the excess of construction in progress over progress billings or progress billings over
construction in progress in Calix’s December 31, 2018 balance sheet?
A. P1,312,500
B. P2,062,500
C. P750,000
D. P2,943,750

Jeremiah Co. is constructing a tunnel for 800 million. Construction began in 2021 and is estimated to be completed
in 2021. At December 31, 2018, MIAH has incurred costs totaling 356 million with 85 million of that incurred in
2018, 143 million in 2017, and the remainder during 2009. Jeremiah believes that it completed 30% of the tunnel
during 2018, although that may change based on future activity. Jeremiah Co. Uses PAS 11 for its accounting
and regards its cost numbers as very uncertain (cost recovery method).

2. What amount of revenue should Jeremiah Co. Recognize for the year ended December 31, 2018?
A. no revenue until 2021
B. 356 million
C. 240 million
D. 85 million

A construction contract has a fixed price contract for P100,000 to construct a building of a design that
has never before been constructed and using materials that have never before been used in the
construction of building. The contractor began construction of the building in 2018 and expects that
construction will take at least five years. In 2018 the contractor incurred P5,000 contract costs on the
project. At the end of 2018 the contractor cannot estimate the outcome of the contract with sufficient
reliability to estimate the project’s percentage of completion (because of the uncertainties arising from
the new design and new materials the entity cannot estimate total expected contract costs with
sufficient reliability). It is highly likely that the contract price will be received from the customer.
3. At the end of 2018, how much revenue should be recognized by the contractor?
A. zero
B. 5,000
C. 100,000
D. cannot be determined

A construction contractor has a fixed price contract for P100 million to construct a building:
The contractor’s estimate of total contract costs is P60 million. It will take two years to construct the
building. At the end of the first year of the project (December 31, 2018):
(1) The contractor has incurred costs of P20 million on the contract, including P2 million on cement that
is held offsite
(2) An independent surveyor certified that 28% of the contract work is completed
(3) The site was cleared (stipulated in the contract to constitute 10% of the total project), the foundation
laid (stipulated as 5% of the total project) and the walls of the building erected (stipulated as 14% of
total project)
The contractor determines that the stage of completion of the construction contract is measured most
reliably by reference to the proportion that costs incurred for work performed to date bears to the
estimated total costs.

4. At December 31, 2018, what is the stage of completion of the contract?


A. 33.33%
B. 30%
C. 29%
D. 28%

5. Assuming the same information above, and if the contractor determines that the stage of completion
is measured most reliably by reference to independent surveys of work performed, the stage of
completion is:
A. 33.33%
B. 30%
C. 29%
D. 28%

6. Assuming the same information above, and if the contractor determines that the stage of completion
is measured reliably by reference to completion of physical proportion of the contract work:
A. 33.33%
B. 30%
C. 29%
D. 28%

A contractor entered into a construction contract on January 1, 2018. The contractor agrees to a fixed
price of P9,000,000 to build a bridge. The contractor’s initial estimate of contract costs is P8,000,000.
The contract expects that it will take three years to build the bridge. The contractor uses calendar year.
By the end of the first year of the contract, the contractor’s estimate of total costs has increased to
P8,050,000 (costs incurred in 2018 amounted to P2,093,000).

In 2019 the customer and contractor agree to a variation resulting in an increase in contract revenue
of P200,000 and estimated additional contract costs of P150,000. At the end of 2019, costs incurred of
P4,075,000 include P100,000 paid for standard materials stored at the site to be used in 2018 to
complete the project.

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.
7. Determine the revenue, expenses and profit for 2019:
Revenue Expense Profit
A. 4,468,000 3,975,000 493,000
B. 2,340,000 2,093,000 247,000
C. 5,071,000 4,075,000 503,000
D. 4,568,000 4,075,000 493,000

8. Using same information above, determine the revenues, expenses and profit in 2020:
Revenue Expense Profit
A. 4,468,000 3,975,000 493,000
B. 2,340,000 2,093,000 247,000
C. 2,392,000 2,132,000 260,000
D. 2,592,000 2,032,000 497,000
A construction contractor has a fixed price contract for P100,000 to construct a building. The
contractor’s initial 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 (December 31, 2018), 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 by cost-
to-cost method.
9. Determine the revenue, expenses and profit in 2018:
Revenue Expenses Profit
A. 30,000 18,000 12,000
B. 32,000 20,000 12,000
C. 31,333 18,000 13,333
D. 33,333 20,000 13,333

MIAH Construction has used the cost-to-cost method of percentage of completion. The following are
available relating to a recently completed building project with fixed price of P2,000,000
2017 2018 2019
Gross profit (loss) 75,000 140,000 (20,000)
Cost incurred 360,000 ? 820,000

10. What was the estimated cost to complete the project at the end of 2018?
A. 656,667
B. 985,000
C. 1,641,667
D. none of the choices
-do it yourself-
1. The % of completion method of inventory valuation of long term construction contract
A. Recognizes income upon completion of work
B. Recognizes income based on collection billings
C. Recognizes income based on the progress of work
D. Does not recognize income at the balance sheet date

2. In accounting for a long term construction type contract using the percentage of completion method,
the gross profit recognized during the first year would be the estimated total gross profit from the
contract multiplied by the percentage of the cost incurred during the year to the
A. Total cost incurred to date
B. Total estimated cost
C. Unbilled portion of the contract price
D. Total contract price

3. The theoretical support for using the percentage of completion method of accounting for long term
construction projects is that it
A. Is conservative
B. Reports a lower net income
C. Closely conforms to the cost principle
D. Produces a realistic matching of expenses with revenues
4. If a company uses the percentage of completion method of accounting for long term construction
contracts, then during the period of construction, financial information related to a long term contract
will
A. Appear on both the income statement and statement of financial position during the
construction period
B. Appear only on the income statement during the period of construction
C. Appear only on the statement of financial position during the period of construction
D. Not appear on the financial statements
5. What is the basis for determining the gross profit to be recognized in the second year of a three
year contract under the percentage of completion method?
A. Cumulative actual costs incurred only
B. Incremental cost for the second year only
C. Cumulative actual costs and estimated costs to complete
D. No gross profit would be recognized in year 2

6. When the percentage of completion method of accounting for long term construction projects is
used, why is the balance of the Construction in Progress account increased by the annual
recognized gross profit on long term construction contracts?
A. The cost of the contract has increased
B. The project’s value has increased above cost
C. The economy experiences inflation over the construction period
D. Construction in progress is not increased by the annual recognized profit

7. A company uses the percentage of completion method to account for a four-year construction
contract. Progress billings sent in the second year that were collected in the third year would
A. Be included in the calculation of the income recognized in the second year
B. Be included in the calculation of the income recognized in the third year
C. Be included in the calculation of the income recognized in the fourth year
D. Not be included in the calculation of the income recognized in any year

8. In accounting for a long-term construction contract for which there is a projected profit, the balance
in the Construction in Progress asset account at the end of the first year of work using the
percentage of completion method would be
A. Zero
B. Equal to the actual cost incurred during the year
C. The same as the balance of Progress Billings on Construction Contracts
D. Equal to the sum of the actual cost incurred and the recognized gross profit during the year

9. How should the balances of Progress Billings and Construction in Progress be shown at reporting
dates prior to the completion of a long term contract?
A. Progress billings as income, Construction in Progress as inventory
B. Net, as income from construction if credit balance, and loss from construction if debit balance
C. Progress billings as deferred income, Construction in Progress as a current asset
D. Net, as a current asset if debit balance and current liability if credit balance

10. A construction company uses the percentage of completion method of recognizing revenue from
construction contracts. Then, revenues that are earned but unbilled at the reporting date should be
disclosed
A. As a long term receivable in the noncurrent assets section of the statement of financial
position
B. Only as a footnote disclosure until the customer is billed for the percentage of work
completed
C. As a construction in progress in the current assets section of the statement of financial
position
D. As a construction in progress in the noncurrent assets section of the statement of financial
position

11. Under PAS 18, revenue is recognized based on


A. Fair value of the consideration received or receivable
B. Fair value of the consideration transferred or payable
C. Carrying value of the consideration received or receivable
D. Carrying value of the consideration transferred or payable

12. The cost recovery method of accounting for long-term construction contract preferable when
A. A contractor is involved in numerous projects
B. The contract entail relatively long period of construction
C. Lack of dependable estimates or inherent hazards cause forecasts to be doubtful
D. Estimates of costs to complete construction toward completion are reasonably dependable

13. Under the cost recovery method,


A. Income is recognized immediately
B. Income is recognized on a proportionate basis as the cash is received on the product sale
C. Income is recognized when the cash received from product sale is lower than product costs
D. Income is recognized when the cash received from product sale is higher than product costs

14. The percentage of completion method of accounting for construction contract is preferable when
A. Estimate of costs and extent of progress toward completion are reasonably dependable
B. The collectability of progress billings from the customer is reasonable assured
C. A contractor is involved in numerous projects
D. The contract is of relatively short duration

15. The cost recovery method


A. Is similar to percentage of completion method
B. Is the most common method of accounting for real estate sales
C. Is never acceptable under GAAP
D. Is used only when circumstances surrounding a sale are highly uncertain that earlier recognition
is impossible

16. How should the balances in Progress Billings and Construction in Progress be shown at reporting
dates prior to the completion of a long-term construction contract?
A. Progress Billings as income, CIP as inventory
B. PB as deferred income, CIP as deferred expense
C. Net, as current asset if debit balance and current liability if credit balance
D. Net, as loss if debit balance and gain if credit balance

17. A theoretical support for using the percentage of completion method of accounting for long-term
construction projects is that it
A. More closely conforms to cost principle
B. Is more conservative than the cost-recovery method
C. Produces a realistic matching of expenses with revenue
D. Reports a lower net income figure than the cost recovery method