Accounting for Special Transactions

Pre-final Exam

Name: Score:

I. Encircle the letter of the correct answer.

The Soriano Builders Construction Co. started work on three job sites during the current year. Data relating to the three
jobs are given below:
Site Contract Price Cost Incurred Estimated Cost to Billings on Collections on
Complete Contract Contract
Cebu P1000,000 750,000 0 1000,000 800,000
Davao 1,400,000 200,000 800,000 200,000 100,000
Palawan 500,000 200,000 200,000 0 0
1. What amount of RGP should be reported for the current year if the percentage of completion method is used for
all contracts?
a. P130,000 b. P430,000 c. P380,000 d. P480,000 e. answer not given

Solution:
Cebu Davao Palawan Total
CP 1,000,000 1,400,000 500,000
CTD 750,000 200,000 200,000
ECTC 0 800,000 200,000
PoC 100% 20% 50%
TGP 250,000 400,000 100,000
RGP 250,000 80,000 50,000 380,000

Ramous Builders, Inc. entered into a P20,000,000 contract to construct a multi-purpose recreational facility. The
estimated cost to complete the project was P16,000,000 and the contract period was 36 months starting January 1,
2017. The company uses the cost-to-cost method of estimating earnings. On January 1, 2018, the contract price was
reduced to P19,000,000 due to the changes made to the original contract. The accounting records relating to this
contract for the years 2017 to 2019 disclosed the following:
Actual Cost Current Year Estimated Cost to Complete Progress Billings
2017 6,000,000 10,000,000 5,600,000
2018 7,000,000 3,200,000 8,000,000
2019 3,400,000 5,400,000
Under the percentage-of-completion method of recognizing revenue,
2. What was the total estimated gross profit recognized or realized as of December 31, 2018?
a. 2,247,000 b. 2,839,799 c. 3,050,000 d. 2,247,500 e. answer not given

3. What was the estimated gross profit (loss) or realized for the year ended December 31, 2019?
a. P353,000 b. (239,700) c. 352,500 d. 456,120 e. answer not given

Solution:
2017 2018 2019 Total
CP 20,000,000 19,000,000 19,000,000
CIDTY 6,000,000 7,000,000 3,400,000
CTD 6,000,000 13,000,000 16,400,000
ECTC 10,000,0000 3,200,000 0
TECAC 16,000,000 16,200,000 16,400,000
TGP 4,000,000 2,800,000 2,600,000
POC 37.5% 80.25% 100%
TRGP 1,500,000 2,247,000 2,600,000
LESS: RGP PY 0 1,500,000 2,247,000
RGPDTY 1,500,000 747,000 353,000

4. Jett Baby Wong Constructors, Inc. has consistently used the percentage-of-completion method of recognizing
income. In 2017, Jett started working on a P70,000,000 construction contract that was completed in 2018. The
following information was taken from Jett’s 2017 accounting records:
Progress billings P22,000,000
Costs Incurred 21,000,000
Collections 14,000,000
 Estimated Costs to complete 42,000,000
What amount of gross profit should Jett have recognized in 2017?
a. 2,333,333 b. 2,100,000 c. 2,666,667 d. 1,900,000 e. answer not given

Solution:
CP 70,000,000
TECAC 21,000,000+42,000,000 = 63,000,000
POC 33.33%
TGP 70,000,000 – 63,000,000 = 7,000,000
RGP 7,000,000 * 33.33% = 2,333,333

5. Yellow Arrow Construction Co. has consistently used the percentage-of-completion method of recognizing
revenue. During the 2018, Yellow Arrow entered into a fixed-price contract to contract an office building for
P24,000,000. Information relating to the contract is as follows:
At December 31
2018 2019
Percentage of completion 15% 45%
Estimated total cost at completion 18,000,0000 19,200,000
Gross profit recognized (cumulative) 1,200,000 2,880,000
How much is the contract costs incurred during 2019?
a. 2,900,000 b. 5,760,000 c. 8,640,000 d. 5,940,000 e. answer not given

Solution:
CTD 2019 19,200,000 * 45% = 8,640,000
CTD 2018 18,000,000 * 15% = 2,700,000
CI 2019 8,640,000 – 2,700,000 = 5,940,000

6. DD Construction Company began operation on January 1, 2019. During the year, the company entered into a
contract with GG company to construct a manufacturing facility. At that time, DD estimated that it would take
five years to complete the facility at a total cost of P10,800,000. The total contract price for construction of the
facility is P15,000,000. During the year, the company incurred P2,640,000 in construction costs related to the
construction project. The estimated cost to complete the contract is P9,360,000. GG was billed and paid 30% of
the contract price subject to a 10% retention.
Using the percentage of completion method, how much is the excess of Construction in Progress over Contract
Billings or Contract Billings over Construction in Progress? (Indicate of current asset or current liability)
a. (1,200,000) current liability c. 1,200,000 current asset
b. 3,300,000 current asset d. (3,300,000) current liability e. answer not given
Solution:
CIP 15,000,000 * 22% = 3,300,000
TECAC 2,640,000+9,360,000 = 12,000,000
POC 2,640,000/12,000,000 = 22%
PB 15,000,000 * 30% = 4,500,000
CIP NET 3,300,000 – 4,500,000 = (1,200,000)

7. Slaughter Construction Company had a contract starting April 2019, to construct a P18,000,000 building that is
expected to be completed in September 2019, at an estimated cost of P16,500,000. At the end of 2019, the costs
to date were P7,590,000 and the estimated total costs to complete had not changed. The progress billings during
2019 were 3,600,000 and the cash collected during 2019 was 2,400,000.
At December 31, 2019 Slaughter would report Construction in Progress in the amount of?
a. 4,800,000 b. 7,950,000 c. 10,460,000 d. 8,280,000 e. answer not given

Solution:
CP 18,000,000
POC 7,590,000/16,500,000 = 46%
CIP 18,000,000 * 46% = 8,280,000

8. On September 30, 2019, STONE REACH Co., Inc. was awarded the contract to build a 1,000-room hotel for
P48,000,000. Among others, the parties agreed to the following:
 Ten percent mobilization fee (deductible from “final billing”) payable within ten days from the signing of the
contract.
 Retention of 10 percent on all billings (to be paid with the final billing, upon completion and acceptance of
the project); and
  Progress billings are to be paid within 2 weeks upon acceptance.
By the end of 2019, the company had presented one progress billing, corresponding to 10% completion, which was
evaluated and accepted by the client on December 29, 2019 for payment in January of the next year.
In 2019, assuming use of the percentage of completion method of accounting STONE REACH Co., Inc. received a total fee
of
a. 9,120,000 b. 4,800,000 c. 9,600,000 d. 10,460,000 e. answer not given
Solution:
Received 48,000,000 * 10% = 4,800,000

9. Spark Corp. has a contract to construct a P10,000,000 cruise ship at an estimated cost of P8,000,000. The
company will begin construction of the cruise ship in early January 2018 and expects to complete the project
sometime in late 2022. Spark Corp. has never constructed a cruise ship before, and the customer has never
operated a cruise ship. Due to this and other circumstances, Spark Corp. believes there are inherent hazards in
the contract beyond the normal, recurring business risks. Spark Corp. expects to recover all its costs under the
contract. During 2018 and 2019, the company has the following activity:
2018 2019
Costs to date 1,960,000 4,080,000
Estimated costs to complete 6,040,000 3,920,000
Progress billings during the year 2,000,000 2,000,000
Cash collected during the year 1,296,000 2,560,000
On its statement of financial position at December 31, 2019, what amount will be reported for accounting receivable?
a. 704,000 b. 144,000 c. 1,296,000 d. 2,000,000 e. answer not given
Solution:
PB (accumulated) 2,000,000+2,000,000 = 4,000,000
Collection 1,296,000+2,560,000 = 3,856,000
Ending AR 4,000,000 – 3,865,000 = 144,000

Chris Construction Co. began operations in 2019. Construction activity for 2019 is shown below. Gorman uses the cost-
recovery method.
Contract Contract Price Billings through Collections through Costs to Estimated Costs
12/31/19 12/31/19 12/31/19 to complete
1 6,400,000 6,300,000 5,200,000 4,300,000 0
2 7,200,000 3,000,000 2,000,000 1,640,000 3,760,000
3 6,600,000 3,800,000 3,600,000 4,500,000 2,400,000

10. Which of the following should be shown on the income statement for 2019 related to Contract 1?
a. 400,000 b. 1,360,000 c. 4,260,000 d. 2,100,000 e. answer not given
Solution:
RGP 6,400,000 – 4,300,000 = 2,100,000

11. Which of the following should be shown on the statement of financial position at December 31, 2019 related to
Contract 2?
a. (1,360,000) current liability c. (400,000) current liability
b. 1,360,000 current asset d. 400,000 current asset d. answer not given
SOLUTION:
CIP NET 1,640,000 – 3,000,000 = (1,360,000)

12. Which of the following should be shown on the statement of financial position at December 31, 2019 related to
Contract 3?
a. (1,360,000) current liability c. (400,000) current liability
b. 1,360,000 current asset d. 400,000 current asset d. answer not given
SOLUTION:
CIP NET (4,500,000 – 300,000) – 3,800,000 = 400,000

13. Richard Corporation, Inc. is using the cost-recovery method for a P11,200,000 contract that will take two years to
complete. Data at December 31, 2019, the end of the first year are as follows:
Costs incurred to date P5,120,000
Estimated costs to complete 6,560,000
Billings to date 4,800,000
Collections to date 4,000,000
The gross profit or (loss) that should be recognized for 2019 is
a. 480,000 b. (480,000) c. 210,410 d. (210,410) e. answer not given
Solution:
TECAC 5,120,000+6,560,000 = 11,680,000
RL 11,200,000 – 11,680,000 = (480,000)

14. Leon Corp. has a contract to construct a P10,000,000 cruise ship at an estimated cost of P8,000,000. The
company will begin construction of the cruise ship early January 2017 and expects to complete the project
sometime in late 2020. Leony Corp. has never constructed a cruise ship before, and the customer has never
operated a cruise ship. Due to this and other circumstances, Leony Corp. believes there are inherent hazards in
the contract beyond the normal, recurring business risks. Leony Corp. expects to recover all its costs under the
contract. During 2017 and 2018, the company has the following activity:
2017 2018
Costs to date P1,960,000 P4,080,000
Estimated costs to complete 6,040,000 3,920,000
Progress billings during the year 2,000,000 2,000,000
Cash collected during the year 1,296,000 2,560,000

For the year ended December 31, 2018, how much revenue should Leony Corp. recognize on its income statement?
a. 4,080,000 b. 1,960,000 c. 2,120,000 d. 400,000 e. answer not given

Solution:
CR 2018 4,080,000 – 1,970,000 = 2,210,000

15. Columban Industries, Inc. was contracted to construct a two-storey national library for P100,000 in 2019. The
project was to be completed in three years and the stipulation of the contract were as follows:
 15% mobilization fee is to be deducted from the last billing of the contract
 10% retention on all billings
 Payment of progress billings shall be made in 20 days after acceptance
Columban uses cost-to-cost method in estimating the percentage of completion. As of the year 2019, 45% of the contract
price has been realized as revenue. As to billings made, 40% of the contract price has been presented and accepted. All
progress billings accepted were paid by the client except for the last billing which was equivalent to 5% of the contract
price that was accepted last December 24, 2019.
How much was paid by the client to COLUMBA in 2019?
a. 46,500,000 b. 31,500,000 c. 36,000,000 d. 4,500,000 e. answer not given
Solution:
100,000 * 40% *90% (net of retention) 36,000,000
Less: accepted billings less 5% retention 100,000 * 90% * 5% = 4,500,000
Collection net of 5% retention 36,000,000 – 4,500,000 = 31,500,000
Add: mobilization = 100,000 * 15% = 15,000,000
Total payment made by client 46,500,000