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1. The primary issuein accounting for construction contracts is a. the determination of percentage of completion and proper determination of revenue to be recognized during the period. b. the allocation of contract revenue and contract costs to the accounting periods in which construction work is performed. c. the determination of the rate at which physical performance has been made during the reporting period and the future performance on which future revenues will be allocated. d. the allocation of costs of a long-lived asset to permit the proper matching of costs with revenues. 2. A construction contract may be a. fixed price contract b. cost plus contract.

c. a combination of a and b d. any of these

3. VALEDICTION Construction Co. entered into a P80M fixed price contract for the construction of a private road for FAREWELL SPEECH, Inc. The performance obligation on the contract is satisfied over time. VALEDICTION measures its progress on the contract using the “cost-tocost” method. The estimated total contract cost is P40M. The following were the actual costs incurred by VALEDICTION during the first year of the construction: Costs of negotiating the contract (charged immediately as expense) Costs of materials used in construction Costs of materials purchased but not yet used in construction Site labor costs Site supervision costs Depreciation of equipment used in construction Depreciation of idle construction equipment Costs of moving plant, equipment and materials to and from the contract site Costs of hiring plant and equipment Advance payments to subcontractors (subcontracted work is not yet started)

400,000 12,000,000 2,000,000 4,000,000 800,000 480,000 240,000 160,000 560,000 80,000

What is the percentage of completion of the contract as of the end of the first year? a. 42% b. 45% c. 50% d. 46% 4. On Oct. 1, 20x1, ABC Co. enters into a construction contract with a customer. The performance obligation in the contract will be satisfied over time. ABC Co. uses the “cost-to-cost” method in measuring its progress. The estimated total contract cost is ₱10M. In 20x1, ABC Co. incurred a total cost of ₱6M, which includes ₱2M advance payment to a subcontractor (the subcontracted work is not yet started) and ₱200,000 cost of materials not yet installed. ABC Co. does not regard the cost of the unused materials as significant in relation to the expected total contract costs. Moreover, ABC Co. retains control over the unused materials because it can use them in a

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contract with another customer. The contract price is ₱20M. How much is the revenue recognized in 20x1? a. 7,600,000 b. 12,000,000 c. 8,200,000 d. 11,600,000 5. On January 1, 20x1, ABC Co. enters into a contract with a customer for the construction of a building. The contract price is ₱1,000,000. The following are the transactions during 20x1:  At contract inception, the customer makes an advance payment of ₱100,000 as facilitation fee.  ABC Co. incurs total contract costs of ₱300,000 during the period.  The estimated costs to complete as of year-end amounts to ₱500,000.  ABC Co. collects the billing, net of 10% retention by the customer to be used to rectify any unsatisfactory work determined at the completion of the contract. How much is the gross profit earned from the contract in 20x1? a. 75,000 b. 82,000 c. 375,000 d. 482,000 Use the following information for the next three cases (three questions per case): In 20x1, ABC Co. enters into a construction contract with a customer. The contract price is ₱10,000,000. Information on the contract follows: Costs incurred to date Estimated costs to complete

20x1 2,400,000 3,600,000

20x2 4,500,000 1,500,000

20x3 6,000,000 -

Case #1: At contract inception, ABC Co. assesses its performance obligations in the contract and concludes that it has a single performance obligation that is satisfied over time. ABC Co. determines that the measure of progress that best depicts its performance on the contract is “cost-to-cost” method. 6. How much is the revenue recognized in 20x1? a. 4,200,000 b. 4,000,000 c. 2,800,000 d. 3,500,000 7. How much is the cost of construction recognized as expense in 20x2? a. 2,100,000 b. 2,400,000 c. 3,800,000 d. 1,500,000

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8. How much is the gross profit recognized in 20x3? a. 1,000,000 b. 1,500,000 c. 2,100,000 d. 2,800,000 Case #2: At contract inception, ABC Co. assesses its performance obligations in the contract and concludes that it has a single performance obligation that is satisfied over time. However, ABC Co. determines that the outcome of the performance obligation cannot be reasonably measured but expects to recover the contract costs incurred. 9. How much is the revenue recognized in 20x1? a. 4,200,000 b. 4,000,000 c. 2,400,000 d. 0 10. How much is the cost of construction recognized as expense in 20x2? a. 2,100,000 b. 2,400,000 c. 3,800,000 d. 0 11. How much is the gross profit recognized in 20x3? a. 5,500,000 b. 1,500,000 c. 4,000,000 d. 2,100,000 Case #3: At contract inception, ABC Co. assesses its performance obligations in the contract and concludes that it has a single performance obligation. In its determination of the satisfaction of the performance obligation, ABC Co. identifies that, during the construction period, ABC Co. retains control over the asset created in the contract. This precludes the customer from simultaneously receiving and consuming the benefits provided by ABC Co.’s performance as ABC Co. performs. Moreover, the asset created in the contract has an alternative use to ABC Co. because, in case the contract is cancelled, ABC Co. retains ownership over any asset created and can direct that asset for another use without significant modification or cost. Accordingly, ABC Co. concludes that the performance obligation is satisfied at a point in time.

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ABC Co. determines the point in time when the performance obligation is satisfied using the principles in PFRS 15 and concludes that the performance obligation is satisfied only when the construction is completed and the control over the promised good is transferred to the customer. 12. How much is the revenue recognized in 20x1? a. 4,200,000 b. 4,000,000 c. 2,400,000 d. 0 13. How much is the cost of construction recognized as expense in 20x2? a. 2,100,000 b. 2,400,000 c. 3,800,000 d. 0 14. How much is the gross profit recognized in 20x3? a. 5,500,000 b. 1,500,000 c. 4,000,000 d. 2,100,000 15. ABC Co. started work on two separate projects during 20x1. Information on these projects is shown below:

Project A B

Contract price 9,000,000 8,000,000

Costs incurred 4,000,000 5,000,000

Estimated costs to complete 2,000,000 -

Progress billings 5,000,000 8,000,000

How much is the total balance of the “construction in progress” accounts as of December 31, 20x1 under percentage of completion method? a. 4,000,000 b. 6,000,000 c. 14,000,000 d. 0 “Come to Me, all you who labor and are heavy laden, and I will give you rest.” (Matthew 11:28)

- END SOLUTIONS: 1. B 2. D 3. Solution:

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The total costs incurred to date are computed as follows: Costs of materials used in construction Site labor costs Site supervision costs Depreciation of equipment used in construction Costs of moving plant, equipment and materials to and from the contract site Costs of hiring plant and equipment Total costs incurred to date

12,000,000 4,000,000 800,000 480,000 160,000 560,000 18,000,000

The percentage of completion as of the end of the first year is computed as follows: Total costs incurred to date Percentage of completion = Estimated total contract costs Percentage of completion = 18,000,000 ÷ 40,000,000 Percentage of completion = 45% 4.

Solution: Percentage of completion = (6M – 2M – 200K) ÷ 10M Percentage of completion =(3.8M ÷ 10M) =38%

38% x 20M = 7.6M 5. A Solution: (a) (b)

Total contract price Costs incurred to date Estimated costs to complete Estimated total contract costs Expected gross profit from contract Multiply by: Percentage of completion (a) ÷ (b) Gross profit earned to date Less: Gross profit earned in previous years Gross profit for the year

1,000,000 300,000 500,000 800,000 200,000 37.50% 75,000 75,000

6. B (see solutions below) 7. A (see solutions below) 8. A Solutions: Total contract price Costs incurred to date (a) Estimated costs to complete Estimated total contract costs (b) Expected profit (loss) Multiply by: % of completion (a) ÷ (b)

Profit (loss) to date Profit recognized in prior years Profit (loss) for the year

20x1 10,000,000 2,400,000 3,600,000 6,000,000 4,000,000 40% 1,600,000 1,600,000

20x2 10,000,000 4,500,000 1,500,000 6,000,000 4,000,000 75% 3,000,000 (1,600,000) 1,400,000

20x3 10,000,000 6,000,000 6,000,000 4,000,000 100% 4,000,000 (3,000,000) 1,000,000

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Total contract price Multiply by: % of completion Contract revenue to date Contract revenue in prior yrs. Contract revenue for the year Cost of construction (a) Profit (loss) for the year

20x1 10,000,000 40% 4,000,000 4,000,000 (2,400,000) 1,600,000

20x2 10,000,000 75% 7,500,000 (4,000,000) 3,500,000 (2,100,000) 1,400,000

20x3 10,000,000 100% 10,000,000 (7,500,000) 2,500,000 (1,500,000) 1,000,000

20x1 2,400,000 2,400,000 (2,400,000) -

20x2 4,500,000 (2,400,000) 2,100,000 (2,100,000) -

20x2 10,000,000 (4,500,000) 5,500,000 (1,500,000) 4,000,000

9. C (see solutions below) 10. A (see solutions below) 11. C Solutions: Contract revenue to date Contract revenue in prior yrs. Contract revenue for the year Cost of construction (b) Profit (loss) for the year (a)

The “contract revenue to date” in 20x1 and 20x2 are equal to the costs incurred to date. However, the contract revenue to date in 20x3 is the transaction price of ₱10,000,000 because the contract is 100% complete. The revenues recognized in 20x1 and 20x2 are equal to the recoverable costs incurred during those years. In 20x3, when the construction is completed, the revenue recognized is the transaction price adjusted for the revenues recognized in the previous years. (a)

(b) “Cost

of construction” is equal to the costs incurred during the period. In 20x2 and 20x3, the costs of construction are computed as “costs incurred to date” minus “costs incurred in prior years: 20x2: (4.5M – 2.4M = 2.1M) and 20x3: (6M – 4.5M = 1.5M).

12. D (see solutions below) 13. D (see solutions below) 14. C Solutions:

Contract revenue to date (a) Contract revenue in prior years Contract revenue for the year Cost of construction (b) Profit (loss) for the year

20x1 -

20x2 -

20x3 10,000,000 10,000,000 (6,000,000) 4,000,000

No revenue is recognized during the construction period because the performance obligation is satisfied at a point in time. The whole of the transaction price is recognized as revenue only in 20x3 when the construction is completed and the control over the promised good is transferred to the customer. (a)

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The costs incurred each year during the construction period are deferred and recognized in full only in 20x3 when the related revenue is recognized. (b)

15. B Solution: Profit (loss) for the year is computed as follows:

(a) (b)

Project Total contract price Costs incurred to date Estimated costs to complete Estimated total contract costs Expected profit (loss) Multiply by: % of completion (a) ÷ (b) Profit (loss) to date Profit in previous years Profit (loss) for the year

A 9,000,000 4,000,000 2,000,000 6,000,000 3,000,000 67% 2,000,000 2,000,000

B 8,000,000 5,000,000 5,000,000 3,000,000 100% 3,000,000 3,000,000

The balances in construction in progress accounts as of December 31, 20x1 under percentage of completion are determined as follows: CIP – A Costs incurred Profit

CIP – B

4,000,000 2,000,000

5,000,000 3,000,000 6,000,000

8,000,000

*

-

*Since project B is 100% complete, it is assumed that the completed project was turned over to the customer.