SPECIAL REVENUE RECOGNITION

LONG TERM CONSTRUCTION CONTRACTS

Long Term Construction Contracts H101
1. Binay Construction Company has contracted to build the Makati City Hall Building. The construction
is scheduled to begin on January 1, 2015, and the estimated time of completion is July 1, 2018. The
building cost is estimated to be P50 million and this will be billed a t P55 million. The following
relates to the construction period:

2015 2016 2017 2018

Cost to date 15,000,000 25,000,000 35,000,000 50,000,000
Estimated cost to complete 35,000,000 25,000,000 15,000,000 -
Progress Billings to date 7,000,000 20,000,000 35,000,000 55,000,000
Cash collected to date 7,000,000 18,000,000 30,000,000 55,000,000

a. Compute for the revenue, costs and realized gross profit at each year.
year.
b. Prepare the entries for these transactions.

2. Junjun Company was recently awarded a P14 million contract to construct a shopping mall for SM,
Inc. Junjun estimates it will take 3 years and 6 months to complete the contract. The company uses
cost-to-cost method to assume profits.

The following information details the actual and estimated costs for the year 2015-2018:

Year Actual Costs Estimated Cost to Complete

2015 6,500,000 6,800,000
2016 3,300,000 3,900,000
2017 2,400,000 1,900,000
2018 1,700,000 -0-

a. Compute for the revenue, costs and realized gross profit at each year.
year.
b. Prepare the entries for these transactions.

3. Noynoy Construction Company is a contractor for the construction of large office buildings. At the
beginning of 2018, three buildings were in progress. The following date relates to three buildings at
the beginning of
beginning of the year:

Contract Price Costs incurred Estimated Cost to complete

Building 1 4,000,000 2,070,000 1,380,000
Building 2 9,000,000 6,318,000 1,782,000
Building 3 13,150,000 3,000,000 9,000,000

During 2018, the following costs were incurred:

Costs incurred Estimated cost to complete (December 31, 2018)
Building 1: 930,000 750,000
Building 2: 1,800,000 Job Completed
Building 3: 7,400,000 2,800,000
Building 4: 800,000 1,200,000 (Contract Price: 2,500,000)

a. Revenue,
Revenue, costs and gross profit in 2018 using percentage of completion.
b. Gross profit using zero profit method.

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4. Napoles Company is a contractor for the construction of large office buildings. At the beginning of
2018, one building is in progress. The following described the status of the building at the beginning
of the year:

Contract price 6,300,000

Costs incurred to January 1, 2018 (including P50,000
worth of materials stored at the site to be used
in 2019 to complete the project) 1,425,000
Estimated costs to complete, January 1, 2018 4,075,000

During 2018, the following data were obtained with respect to the same building:
Costs incurred to date 3,040,000
Cost to complete, December 31, 2018 1,960,000

a. Realized gross profit(loss) to be reported for the year 2018 using the percentage of
completion and zero – profit.

5. In 2018, DMCI was contracted by PNoy to build a bridge for P 150 million. The project to be
completed in two years and the contract provided for:
 10% mobilization fee (to be deducted from the last billing) payable within 15 days after the
assigning of the contract
 10% retention provision on all billings
 Payment of progress billing within 10 days from acceptance

DMCI uses percentage of completion, estimated a 25% gross margin on the project. By the end of
2018, DMCI had presented progress billings corresponding to 50% completion. All of the progress
billings presented in 2018 were accepted, except the last one for 10% which was accepted on January
5, 2018. With the exception of one bill for 8% which was due on January 7, 2019, all of the billings
accepted in 2018 were settled. Payments made by PNoy in 2018 amounted to:
a. 33.8 million b. 58.2 million c. 82.5 million d. 59 million

6. On January 1, 2018, a fire destroyed the office building of Zeus and destroyed all the files in the
accountant’s desk. The president of the company contracted you to help reconstruct the information.
The following date were taken from the salvage files:
December 31, 2016 December 31, 2017
Estimated costs to complete 1,556,250 1,000,000
Cost incurred 462,500
Percentage of completion 60%
RGP to date 62,500 150,000

What is the estimated gross profit as of 2016 of this contract?

a. 312,500 b. 156,250 c. 208,333 d. 250,000

7. On August 1, 2018, Athena obtained a contract to construct a building. The building was estimated to
be built at a total cost of P7,500,000 and is scheduled for completion on October 2020. The contract
contains a penalty clause to the effect that the other party was to deduct P35,000 from the contract
price for each week of delay. Completion was delayed for 5 weeks. Furthermore, the contract also
stipulated that once there was an unexpected increase in costs, the contract shall be modified by an
amount equal to 100% of the increase subject to the approval and evaluation of the client. In 2019,
the estimated costs of particular construction material amounting to P520,000 were bought for
P780,000. The increase in the contract price related to this cost escalation was approved by the client.
The records show:
2018 2019 2020__
Cost incurred 1,750,000 6,440,000 1,085,000
Estimated cost to complete 7,000,000 910,000 --
Progress billings 1,400,000 15,225,000 4,200,000

Using percentage of completion method, compute for the following:

a. Realized gross profit or (loss) in 2018, 2019, 2020
b. Construction in Progress as of 2019
c. Due from/ due to customer as of 2018 and 2019

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8. Poseidon Construction Company recently acquired the Percy Company. Percy has incomplete
accounting records on one particular project, below are the only information available:
2016 2017 2018__
Cost incurred P 1,000,000 1,250,000 ?
Estimated cost to complete 2,250,000 950,000 --
Recognized revenue 1,100,000 ? ?
Realized gross profit on contract ? 50,000 (50,000)
Contract Price P 3,500,000

Percy Company uses the percentage of completion method and the percentage of work completed is
determined through surveys of work performed (engineer’s estimates). Compute the realized gross
profit to be recognized in 2016, revenue reported in 2017 and cost incurred in 2018.

a. 250,000; 2,400,000; 2,250,000 c. 1,100,000; 1,300,000; 2,250,000

b. 100,000; 1,300,000; 1,150,000 d. 1,000,000; 2,400,000; 3,400,000

9. Hercules Builders 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 t he
first year:
Cost of material – P 25 million
Site Labor cost, including supervision of 2 million – P 20 million
Agreed administrative costs per contract to reimbursed by customer – P 10 million
Depreciation of the paint used for the construction – P 2 million
Insurance costs (2/3 for the other project) – P 6 million
Marketing costs for selling apartments when they are ready – P 10 million
Depreciation of idle equipment not us ed on particular contract – P 2 million
Selling costs – P 3 million
Borrowing costs incurred during the construction period – P 1 million
Advances made to subcontractors – P 20 million
Cost incurred in obtaining the contract previously written off – P 1.5 million
Total estimated cost of the project – P 180 million
The percentage of completion at the end of the year:
a. 33% b. 28% c. 25% d. 39%

10. On July 1, 2018, Atlas Construction Company contracted to build an office building for a total contract
price of P 975,000.
2016 2017 2018__
Costs incurred to date P75,000 P600,000 P1,050,000
Estimated costs to complete 675,000 400,000 --
Billings 150,000 550,000 275,000

How much is the Construction in progress account balance at December 31, 2017 using the
percentage of completion?
a. 900,000 b. 575,000 c. 825,000 d. 350,000

11. On July 1, 2017, Centaur Construction Company contracted to build an office building for Harry Potter
for P 3,900,000
2017 2018 2019_ _
Costs incurred to date P 300,000 P 2,400,000 P4,200,000
Estimated costs to complete 2,700,000 1,600,000 --
Billings to Harry Potter 600,000 2,200,000 1,100,000

How much is the CIP account balance at December 31, 2018 using POC method?
How much is the CIP, net of billings at December 31, 2018, using the zero profit method?
How much is the realized gross profit/(loss), using percentage of completion method in 2019?

a. 2,300,000; 100,000; (300,000)

b. 2,390,000; 100,000; (200,000)
c. 2,300,000; (500,000); (300,000)
d. 2,300,000; (500,000); (200,000)

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12. Medusa Corporation entered in a long term project in 2017 and continued through 2018. The
company has available dependable and reliable estimates. As of 2018, Medusa billed 2/5 of the total
contract price. Some other information about the project were as follows:
2017 2018
Construction cost to date P 148,750 P 420,000
Excess of Construction in Progress
Over billings – due from/ (due to) 38,750 (61,250)
Contract billings 145,000 612,500
Collections from the contract 135,000 437,500

Compute for POC: a. 28% b. 12% c. 36% d. 44%

13. On January 2017, Green Arrow Company began constructing a P 10,500,000 contract. As of year –
end, the record shows:
2017 2018 2019_ _
Construction in Progress P2,205,000 P6,746,250 ?
Estimated costs to complete 7,998,750 3,753,750 --
Costs incurred 2,126,250 4,845,000 P3,378,750

How much is the realized gross profit in 2018 using the POC method and realized gross profit
in 2019 using zero profit method?
a. (146,250); 291,750 c. (225,000); 375,000
b. (303,750); 0 d. (303,750; 375,000)

14. The Flash Company enters into a contract with Hulk Corporation to construct a 10 – storey building
for P 8 million. The following data were taken from the Company’s files:
2017 2018__
Cost incurred P --- P 3,136,418
Percentage of completion --- 60%
Estimated costs to complete 6,004,024 3,091,616
Income recognized to date 98,994 162,576
What is the POC as of 2017 of this construction contract?
a. 20% b. 35% c. 40% d. 25%

15. On January 15, 2016, Thor Company won a bidding to build an athletic stadium. The project was to be
built at a total cost of 5,500,000 and was scheduled for completion by September 1, 2018. One clause
of the contract stated that Thor was to deduct 15,000 from the 6,600,000 bid price for each week that
completion was delayed. Completion was delayed six weeks.

Data for the three years are as follows:

2016 2017 2018__

Cost incurred 1,782,000 2,068,000 1,650,000
Estimated costs to complete 3,618,000 1,650,000 --
Contract billings each year 1,200,000 1,900,000 ?
Cash Collections each year 1,000,000 1,800,000 3,710,000
Operating expenses 100,000 90,000 70,000

Find the (1) Net Income for the year 2017 using POC, (2) balance of Construction in Progress,
net of Progress Billings at December 31, 2017 using POC and (3) balance of Construction in
Progress, net of Progress Billings in 2017 using zero profit method.
a. 284,000; 1,520,000; 750,000
b. 374,000; 1,784,500; 520,000
c. 248,000; 1,520,500 450,000
d. 743,000; 1,250,000; 570,000

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