Chapter 5
Long Term
Construction Project
(IFRS 11)
Long term construction projects generally are construction projects that extend over one
accounting period. Problems on long term construction projects have appeared very often in the
CPA board examination.
The principal problem to be encountered by CPA candidates on this topic is the computation of
the gross profit to be recognized each year.
The procedures and principles used in solving this problem are based on Philippine Accounting
Standards (PAS) 11 “Construction Contract”
Gross Profit Recognition
The gross profit on a construction project may be recognized upon its completion or each year
as the construction progresses. These two alternative methods of gross profit recognition are
referred to as:
1. The Zero Profit Method
2. The Percentage of Completion Method
Zero Profit Method
This method is used when reasonable estimate of the percentage of completion cannot be
made. Under this method, revenue is recognized each year in an amount exactly equal to costs
incurred until reasonable estimates of the percentage of completion is available. The total gross
profit on the project is recognized in the year of completion of the project.
Percentage of Completion Method
Under this method, gross profit is recognized at the end of each accounting period based on the
percentage of completion of the project. The percentage of completion is usually computed by
dividing the cost incurred to date by the total estimated cost to complete the project.
The formula to compute the gross profit to be recognized each year is as follows:
Contract price
Less: Total estimated costs
(1) Cost incurred to date
Pxx
Pxx
Estimated cost to complete
xx
(2) Total estimated cost
xx
Estimated gross profit
xx
Multiply by percentage of completion (1 ÷ 2)
%
Gross profit earned to date
xx
Less: gross profit earned in prior year(s)
xx
Gross profit earned this year
Pxx
Once the percentage of completion is known, the following alternative formula may be used:
Contract price
Pxx
Multiply by percentage of completion
%
Value of contract earned
xx
Less: cost incurred to date
xx
Gross profit earned to date
xx
Less: gross profit earned in prior year(s)
xx
Gross profit earned this year
Pxx
Cost incurred to date. These include precontract costs and costs incurred after contract
acceptance. Precontract costs include costs of architectural designs, cost of securing the
contract and any other costs that are expected to be recovered if the contract is accepted.
Estimated costs to complete. These are the anticipated cost of materials, labors,
subcontracting costs, and indirect costs (overhead) required in completing the project at a
scheduled time.
Cost of Materials purchased in Advance of their Use
Construction materials purchased several weeks or months before they are actually use in
constructions should not be treated as costs incurred for purposes of computing the
percentage of completion ratio until the materials have been physically used in production,
unless they are specifically purchased for the project.
Anticipated Loss on Long Term Construction Projects
In some cases, the total estimated costs may increase due to increase in the costs of
construction materials. While the increase in the total estimated costs may result in a loss in
the year the estimated cost increased, the entire contract will still result in a profit. Sometimes
however, an increase in total estimated costs is so great that a loss on the entire contract is
anticipated; that is, total estimated costs exceeds the total revenue from the contract. When a
loss is anticipated, PAS No. 26 “Construction Contracts” require reporting the loss in its entirety
immediately when the loss is first anticipated.
Construction in Progress in Excess of Billings/Billings in Excess of Construction in Progress
This represents the difference between the Construction in Progress (CIP) account and the
Contract Billings as shown below:
Construction in Progress
Less: Contract Billings
CIP in excess of billings (current asset)
Billings in excess of CIP (current liability)
Pxx
xx
xx
Pxx
Under the zero profit method, the Construction in Progress account before the year of
completion is debited for the costs incurred to date. In the year of completion the Construction
in Progress account is debited for the cost incurred and gross profit earned on the project.
On the other hand, under the percentage of completion method, the Construction in Progress
account is debited every year for the costs incurred and gross profit earned each year. In the
year of completion, the balance of Construction in Progress account is closed to the Contract
Billings account which have the same balance.
Accounting for Change Order
Change orders are modifications of an original contract. Contract revenue and costs should be
adjusted to reflect change orders that are approved by the contractor and customer.
PROBLEMS
1. The following data pertains to Bell Co’s construction jobs, which commenced during
2013.
Project 1
Project 2
Contract price
P420,000
P300,000
Costs incurred during 2013
240,000
280,000
Estimated costs to complete
120,000
40,000
Billed to customers during 2013
150,000
270,00
Received from customers during 2013
90,000
250,000
What amount of gross profit (loss) would Bell report in 2013 under the zero profit
method and the percentage-of-completion method?
a. P(20,000) and P20,000
b. P20,000 and P(20,000)
c. P20,000 and P340,000
d. P40,000 and P420,000
2. Cord Builders, Inc. has consistently used the percentage-of-completion method of
accounting for construction-type contracts. During 2011 Cord started work on a
P9,000,000 fixed-price construction contract that was completed in 2013. Cord’s
accounting records disclosed the following:
December 31
2011
2012
Cumulative contract costs incurred
P3,900,000
P6,300,000
Estimated total cost at completion
7,800,000
8,100,000
How much income would Cord have recognized on this contract for the year ended
December 31,2012?
a. P100,000
b. P300,000
c. P600,000
d. P700,000
3. State Co. recognizes construction revenue and expenses using the percentage-ofcompletion method. During 2012 a single long-term project was begun, which continued
through 2013. Information on the project follows:
2012
2012
Accounts receivable from construction contract
P100,000
P300,000
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 2013 should be
a. P50,000
b. P108,000
c. P128,000
d. P228,000
4. Lake Construction Company has consistently used the percentage-of-completion
method of recognizing income. During 2012 Lake entered into a fixed-rate contract to
construct an office building for P10,000,000. Information relating to the contract is as
follows:
At December 31
2012
2013
Percentage completion
20%
60%
Estimated total cost at completion
P7,500,000
P8,000,000
Income recognized (cumulative)
500,000
Contract costs incurred during 2013 were
a. P3,200,000
b. P3,300,000
c. P3,500,000
d. P4,800,000
5. Hand Construction, Inc. has consistently used the percentage-of-completion method of
recognizing income. During 2013 Hansen started work on a P3,000,000 fixed-price
construction contract. The accounting records disclosed the following data for the year
ended December 31,2013:
Costs incurred
P930,000
Estimated cost t complete
2,170,000
Progress building
1,100,000
collections
700,000
How much loss should Hansen have recognized in 2013?
a. P230,000
b. P100,000
c. P30,000
d. P0
6. Marr construction company has consistently used the percentage-of-completion
method. On January 10,2012. Marr began work on a P6,000,000 construction contract.
At the inception date, the estimated cost of construction was P4,500,000. The following
data relate to the progress of the contract:
Income recognized at 12/31/12
P600,000
Costs incurred 1/10/10 through 12/31/13
3,600,000
Estimated cost to complete at 12/31/13
1,200,000
How much income should Marr recognize for the year ended December 31,2013?
a. P300,000
b. P525,000
c. P600,000
d. P900,000
7. The following data relating to a construction job started by SS Co. during 2013:
Total contract price
P100,000
Actual cost during 2013
20,000
Estimated remaining costs
40,000
Billed to customer during 2013
30,000
Received from customer during 2013
10,000
How much gross profit would SS Co. recognized for 2013 under the zero profit method
and the percentage-of-completion method?
a. P0 and P13,333, respectively
b. P0 and P26,667, respectively
c. P4,000 and P13,333, respectively
d. P12,000 and P33,333, respectively
8. On April 1,2013, BB, Inc., entered into a cost-plus-fixed-free contract to construct an
electric generator for Dalton Corporation. At the contract date, BB estimated that it
would take two years to complete the project at a cost of P2,000,000. The fixed fee
stipulated in the contract is P300,000. BB appropriately accounts for this contract under
the percentage-of-completion method. During 2013, BB incurred costs P700,000 related
to the project, and the estimated cost of December 31, 2013 to complete the contract is
P1,400,000. Dalton was billed P500,000 under the contract.
the gross profit to be recognized by BB Inc. under the contract on December 31,2013 us.
a. P300,000
b. P100,000
c. P200,000
d. P0
9. The Robert Construction Corporation uses the percentage-of-completion method of
accounting. In 2013, Robert began work on a contract it had received which provided for
a contract price of P8,000,000. Other details follows:
Costs incurred during the year
P1,200,000
Estimated costs to complete as of December 31
4,800,000
Billings during the year
1,440,000
Collections during the year
1,000,000
What should be the gross profit recognized in 2013?
a. P160,000
b. P240,000
c. P400,000
d. P1,600,000
10. In 2013, Long Corporation began construction work under a three-year contract. The
contract price is P800,000. Long uses the percentage-of-completion method for
financial-accounting purposes. The income to be recognized each year is based on the
proportion of cost incurred to total estimated costs for completing the contract. The
financial-statement presentations relating to this contract at December 31,2013 follows:
Statement of financial position
Accounts receivable-construction contract building
Construction in progress
Less contract buildings
Cost-of-uncompleted contract in excess of billings
P50,000
47,000
P15,000
3,000
Statement of comprehensive income
Income (before tax) on the contract recognized in 2013
P10,000
The cash collected in 2013 and the initial estimated gross profit on this contract are:
a. P32,000 and P10,000, respectively
b. P32,000 and P160,000, respectively
c. P15,000 and P160,000, respectively
d. P15,000 and P30,000, respectively
11. Cortez Construction Company, Inc., entered into a firm fixed-price contract with Rod
Association on July 1,2011 to construct a four-story office building. At that time, Cortez
estimated that it would take between two and three years to complete the project. The
total contract price for construction of the building is P4,000,000. Cortez appropriately
accounts for this contract under the zero profit method in its financial statements and
for income tax reporting. The building was deemed substantially completed on
December 31,2013. Estimated percentage of completion, accumulated contract costs
incurred, estimated costs to complete the contract and accumulated billings to Rod
under the contract were as follows:
At December
31,2011
10%
P350,000
P3,150,000
At December
31,2012
60%
P2,500,000
P1,700,000
At December
31,2013
100%
P4,250,000
-
Percentage of completion
Contract costs incurred
Estimated costs to complete the
contract
Billings to Rod
P720,000
P2,160,000
P3,600,000
The amount to be shown as excess of cost over billings or (billings in excess of cost)
in December 31,2013
a. P(400,000)
b. P260,000
c. P400,000
d. P(260,000)
12. X company uses the percentage-of-completion method of recognizing income. In 2012,
work was started on a P18,000,000 job completed in 2012. Records in 2013 show the
following:
Progress billing
P6,600,000
Costs incurred
4,500,000
Collections
4,200,000
Cost to complete
10,600,00
Gross profit recognized in 2013 was:
a. P1,400,000
b. P1,200,000
c. P900,000
d. P600,000
13. In 2013 North Construction Co. was contracted to do the private road network of
Subdivision Corp. for P100 million. The project was estimated to be completed in two
years.
The construction contract provided among other things the following:
a. Five percent mobilization fee (to be deducted from the last billing) payable
within fifteen days after the signing of the contract;
b. Retention provision of 10% on all billings, payable with the final bill after the
acceptance of the completed project; and
c. Progress billings on construction are payable within seven days from acceptance.
North estimated its gross margin on the project at 25%. It used the percentage of
completion method of accounting.
By the end of the year, North presented progress billing corresponding to 50%
completion. Subdivision Corp. accepted all the bills presented except the last one for
10% which was accepted on 10 January. With the exception of the second to the last
billing of 8% accepted in 2013 which was due on 3 January 2014, all accepted billings
were settled.
In 2013 North realized gross profit from the subdivision project the sum of
a. P10,000,000
b. P12,500,000
c. P25,000,000
d. P7,500,000
14. On September 14.2013, Contractors Inc. won the bid for the construction of a 1,000
room hotel for Victoria, Inc. on the reclamation are for P1.2 billion. On the terms of
payment, parties agreed the following:
a. One percent mobilization fee (deductible from the final bill) payable within fifteen
days after the signing of the contract;
b. Retention of 10% on all billings, payable with the final bill after the acceptance of
entire completed project; and
c. Progress billings on construction within seven days from date of acceptance.
By the end of 2013, the company had presented only on progress billing for 10%
completion which Victora, Inc. evaluated and accepted on 28 December for payment
in January. The company used the percentage of completion method of accounting.
a.
P9,800,000
b.
P10,800,000
c.
P12,000,000
d.
P1,200,000
15. Bona constructors, Inc. has the following date for large jobs in its Jobs in Progress
account (000’s omitted):
Project no.
Actual cost
Estimated total Contract price
Percent
cost
complete
101
P8,756
172,800
192,000
5
102
11,457
14,875
17,500
75
103
53,865
61,250
87,500
80
104
22,800
39,760
49,700
55
105
44,500
122,310
151,000
35
P141,378
410,995
497,700
The company accounts for its large jobs under the percentage of completion method.
Billings are done as follows:
a. 20% down payment upon contract signing.
b. Balance is billed according to percentage of completion less an application of the
down payment which is also according to percentage of completion.
The total billings made for the large jobs is:
a. P203,286
b. P99,540
c. P104,246
d. P193,786
16. Builders Construction, Inc. uses the percentage of completion method in recognizing
income. In 2011, Builders Construction, Inc. was engaged by SM on a fixed-price
contract to build a 4 story shopping mall.
On January 1,2013, a fire damaged the accounting records of Builders Construction, Inc.
the president of the company has contracted you to reconstruct the contract
information. The following data were taken from the salvaged files:
December 31
2011
2012
Architect’s estimated cost
P7,500,000
P8,000,000
of completion
Costs incurred
3,000,000
Percentage of completion
60%
Income recognized to date
500,000
1,200,000
Compute for the percentage completed in 2011 on SM shopping mall
a. 40%
b. 25%
c. 20%
d. 30%
17. Mega Construction Company was awarded a contract to construct a new sewage system
for MWSS for a piece of P3,250,000. The principal estimate of the cost to complete the
project was P3,000,000. The contract provides for periodic progress billings. A final
billing equal to 25% of the contract price is to be made upon final inspection and
acceptance by the MWSS.
The construction record for the system was as follows:
Date
Cost to incurred to date
Estimated cost to complete
Dec. 31,2011
P1,075,000
P1,612,500
Dec. 31,2012
2,625,000
750,000
Aug. 15,2013
3,425,000
The construction was inspected on August 15,2011, January 15,2012 and Oct. 1,2012
and progress billings equal to 25% of the contract price were made on each of these
dates. The system was completed, and final inspection and acceptance took place on
August 21,2013.
How much is the construction in progress, net of billings in the 2012?
a. P875,000, current liability
b. P2,463,600, current asset
c. P287,500, current liability
d. P62,500, current asset
18. City Builders Construction Company which uses the percentage of completion method
presented the following data relating to the 4 projects:
Project A
Project B
Project C
Project D
Contract price
P2,900,000 P3,400,000
P1,700,000 P2,000,000
Cost incurred, 2012
1,680,000
1,440,000
320,000
Estimated cost to complete,
1,120,000
1,760,000
960,000
2012
Cost incurred,2013
960,000
680,000
863,000
560,000
Estimated cost to complete,
1,300,000
117,000
1,040,000
2013
Operating expenses for 2012 and 2013 were P120,000 for each year.
How much is the net income for the two year ended December 31:
2012
2013
a. P135,000
P309,000
b. P255,000
P489,000
c. P195,000
P429,000
d. P369,000
P135,000
19. Cebu Construction Company began operation on January 2,2013. During the year, the
company entered into a contract with Tommy Company to construct a manufacturing
facility. At that time, Cebu Company estimated that it would take five years to complete
the facility at a total cost of P1,800,000. The total contract price for construction of the
facility is P2,500,000. During the year, the company incurred P440,000 in construction
costs related to the construction project. The estimated cost to complete the contract is
P1,560,000. Tommy 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?
a. P200,000, current asset
b. P125,000, current liability
c. P200,000, current liability
d. P62,50, current asset
20. Marlboro Construction, Inc. entered into a construction contract in 2012 that called for
a contract price of P9,600,000. At the beginning of 2013, a change order increased the
initial contract price by P480,000. The company uses the percentage of completion
method for completing the project. The following data is available:
2012
2013
Cost incurred to date
P4,920,000
P8,640,000
Estimated costs to complete
4,920,000
2,160,000
What gross profit (loss) should Marlboro Corporation recognized in 2012 and 2013?
2012
2013
a.
(P240,000)
(P720,000)
b.
(P240,000)
(P480,000)
c.
P240,000
(P960,000)
d.
P240,000
(P720,000)
21. East Builders works on a P70 million contract in 2013 to construct a shopping mall for
SM Inc. during 2013, East Builders uses the percentage of completion method of
revenue recognition. At December 31,2013, the account balances were:
Construction in progress
P24.55 million
Accounts receivable
2.4 million
Contract billings
12.0 million
Estimated costs to complete
31.85 million
How much is the actual cost incurred in 2013?
a. P24.5 million
b. P49 million
c. P7.5 million
d. P17.150 million
22. On July 1, 2011 Summer Construction Corporation contracted to build an office building
for JG Inc., for a total price of P975,000. Data relating to the project from 2011 to 2013
are as follows:
2011
cost P75,000
2012
P600,000
Contract
incurred to date
Estimated costs to 675,000
400,000
complete
Billings to JG Inc.
150,000
550,000
Summer construction Corp. uses the Zero Profit Method.
2013
P1,050,000
275,000
What is the balance of the Construction in Progress account net of billings at December
31,2012?
a. P125,000 due to JG Inc.
b. P125,000 due from JG Inc.
c. P25,000 due from JG Inc.
d. P25,000 due to JG Inc.
23. Using the data in number 22. Assuming the use of percentage of completion method,
how much is the gross profit (loss) to be recognized in 2012?
a. P(47,500)
b. P47,500
c. P(22,500)
d. P22,500
24. West corporation company recognized gross profit of P31,500 on its long term project
what has accumulated costs 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 Construction in Project account net of billings?
a. P18,500 current liability
b. P18,500 current asset
c. P55,050 current asset
d. P55,050 current liability
25. North Construction Company uses the percentage of completion method of recognizing
gross profit on long term construction contracts. The company started work on two
contracts during 2011. Data relating to the two contracts are given below:
Contract price
Actual cost
Estimated cost to
12/31/12
complete
Contract 1
P1,800,000
450,000
P450,000
Contract 2
1,350,000
262,500
487,500
in 2013. Contrast 3 was started for a contract price of P2,700,000. As of December
31,2013, the following data are available:
Actual cost 1/1/12 to Estimated cost to complete
12/31/13
Contract 1
P840,000
P210,000
Contract 2
540,000
360,000
Contract 3
540,000
960,000
How much income is to be recognized in 2013?
a. P1,302,000
b. P432,000
c. P642,000
d. P270,000
26. Using the data in No. 25, what is the balance of the Construction in Progress account as
of December 31,2013?
a. P3,222,000
b. P3,942,000
c. P1,920,000
d. P2,562,000
27. In 2009, South Builders agreed to construct a commercial building at a price of
P1,000,000. South Builders uses the percentage of completion method of recognizing
revenue on long term construction projects. The data relating to the projects from 2011
to 2013 are as follows:
2011
2012
2013
Cost incurred each year
P280,000
P320,000
P185,000
Estimated cost to complete
520,000
200,000
Billings to date
150,000
400,000
1,000,000
Collections of billings to date
120,000
320,000
940,000
What is the amount of gross profit to be recognized in 2012?
a. P800,000
b. P78,500
c. P85,000
d. P90,000
28. Using the data in No. 27, what is the balance of Construction in Projects net of Contract
Billings account of South Builders’ on December 31,2012?
a. P350,000
b. P300,000
c. P550,000
d. P380,000
29. Using the data in No. 27, assuming the company uses the zero profit of recognizing
revenue from the project, what is the balance of the Construction in Progress account
net of contract billings as of December 31,2012?
a. P200,000
b. P250,000
c. P350,000
d. P300,000
30. On January 2,2013, JGG Builders Corp. of Ilocos enters into a contract to construct a
building for P40,000,000. 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 2013:
Cost incurred in
Estimated costs to
Contract price
2013
complete
Basic contract
P8,000,000
P28,000,000
P40,000,000
Change order # 1
50,000
50,000
125,000
Change order # 2
50,000
Change order # 3
300,000
300,000
600,000
Change order # 4
125,000
100,000
Under the percentage of completion method, what is the gross profit to be recognized
on December 31,2013 (rounded to the neared peso)?
a. P907,828
b. P888,889
c. P909,063
d. P970,830
e. ANSWERS
1.
2.
3.
4.
5.
A
A
A
B
B
6.
7.
8.
9.
10.
A
A
B
C
B
11.
12.
13.
14.
15.
C
D
B
C
A
16.
17.
18.
19.
20.
C
D
A
A
B
21.
22.
23.
24.
25.
D
A
A
C
C
26. A
27. A
28. A
29. A
30. A
SOLUTIONS AND EXPLANATIONS
1.
Under the zero profit method. The expected income on project 1 [P420,000 – (240,000 +
120,000) = P60,000] is not recognized until the project is completed. However, under this
method, an expected loss on a contract must be recognized in full in the period in which it is
discovered. Project 2 has an expected loss of (P20,000) [P800,000 – (280,000 + 40,000)] which
must be recognized immediately in 2013.
Under the percentage –of-completion method gross profit is recognize using the following
formula:
Costs to date
X Estimated profit = Gross profit to date
Total estimated costs
Bell would recognize gross profit of P40,000 on project 1:
P240,000
x
P240,000+120,000
[420,000- (240,000+120,000)] = P40,000
Note that prior years’ gross profit need not be subtracted from P40,000 because the project
commenced during 2013. Under both the percentage-of-completion method and the zero
profit method, an expected loss must be recognized in full in the period in which the expected
loss is discovered. Project 2 has an expected loss of (P20,000) [300,000-(280,000+40,000)]
which must be recognized in full in 2013. The net gross profit recognized on the two project is
P20,000 (P40,000 profit less (P20,000) loss.
2. The total expected income on the contract at 12/31/2012 is P900,000 (P9,000,000 –
8,100,000). The formula for recognizing profit under the percentage-of-completion method is:
Costs to date
X Expected = Profit recognize
Total expected costs
profit
to date
P6,300,000
x
900,000 = P700,000
8,100,000
This result is the total profit on the contract in 2009 and 2010. The 2009 profit recognized must
be subtracted from 700,000 to determine the 2010 profit. At 12/31/2010, the total expected
income on the contract was P1,200,000 (P9,000,000- 7,800,000). The income recognize in 2011
was P600,000, as computed below:
P3,900,000
x
1,200,000 = P600,000
7,800,000
Therefore, 2012 income is P700,000 less P600,000, or P100,000.
3.
Profit to be recognized using the percentage-of-completion method is generally
computed as follows:
Costs to date
X Expected = Profit recognized
Total expected costs
profit
in previous periods
Not enough information is given in this problem to perform this computation, so 2013 profit
must be computed indirectly. Since only construction expenses and profit are debited to the
construction-in-progress (CIP account), 2012 profit must have been P17,000 (P122,000 CIP less
P105,000 const.exp). Cumulative profit recognized by the end of 2011 must be P67,000
[364,000 CIP less 297,000 cumulative const.exp. (P105,000 + 192,000)]. Therefore, 2013 profit
was 50,000 (67,000-17,000).
CIP
2012 Exp.
10,000
2012 profit
?
2012 Profit = P17,000
2012 End. Bal
122,000
2013 Exp.
192,000
2013 profit
?
2013 Profit = P50,000
2013 End. Bal
364,000
4.
Based on the information given it must be assumed that costs incurred are used to
measure the extent of progress toward project completion. At 12/31/2012, the project was
20% complete and total estimated costs were P7,500,000. Therefore, costs incurred as of
12/31/2012 were 20% of 7,500,000, or 1,500,000. At 12/31/2013, the project was 60%
complete and total estimated costs were P8,000,000. Therefore, costs incurred as of
12/31/2013 are 60% of P8,000,000 or P4,800,000. The costs incurred during 2013 were
P4,800,000 less P1,500,000 or P3,300,000.
5.
The requirement is to determine the amount of loss to be recognized in 2013 on a long
term,f ixed-price construction contract. Under both the percentage-of-completion method and
the zero profit method, an expected loss on a contract must be recognized in full in the period
in which the expected loss is discovered. Therefore, Hanson must recognize a loss of P100,000
in 2013.
Expected contract revenue
Expected contract costs (P930,000 + 2,170,000)
Expected loss
P(100,000)
P3,000,000
3,100,000
6.
Contract Price
Less total estimated costs:
Cost to date
Cost to complete
Estimated gross profit
% of completion (P3,600,000 / 4,800,000)
P6,000,000
P3,600,000
1,200,000
4,800,000
1,200,000
75%
Income recognize to date
900,000
Income recognize at 2012
600,000
Income recognized in 12/31/2013
P300,000
7.
Under the zero profit method no gross profit is to be recognized since the project is not
yet completed, under the percentage-of-completion method the gross profit to be recognized
in 2013 is computed below:
Contract price
P100,000
Estimated cost:
Cost to date
20,000
Cost to complete
40,000
60,000
Estimated gross profit
40,000
% of completion (P20,000 / 60,000)
33 1/3%
Gross profit recognized
P13,333
8.
BB Inc. will earn P300,000 in total income from this project, regardless of the actual
costs incurred, since it is a cost-plus-fixed-free contract. The amount to be recognized in 2013 is
computed as follows:
Costs incurred to date
X Fixed = Income recognize
Total estimated costs
fee
for 2008
P700,000
*P700,000+1,400,000
X 300,000 = P100,000
*Costs incurred to date plus estimated costs to complete the project.
Note that the P500,000 billed under the contract is not relevant in determining the amount of
gross profit to be recognized.
9.
Contract price
Estimated costs:
Cost incurred during the year
Cost to complete
Estimated gross profit
% of completion (1,200,000 / 6,000,000)
Gross profit earned in 2013
P8,000,000
1,200,000
4,800,000
10.
The cash collection in 2013 is computed below:
Contract billings
Less: Accounts receivable
Cash collected in 2013
6,000,000
2,000,000
20%
P400,000
P47,000
15,000
P32,000
The initial gross profit on the contract is computed as follows:
Contract price
Gross profit rate:
Income recognized
Const. in progress
Initial gross profit
P800,000
-
P10,000 =
50,000
Alternative Computation:
GP recognized
Divided by percentage of completion:
CIP
= P50,000 =
CP
80,000
Initial Gross Profit
11.
Contract costs incurred to date, 2013
Less: Loss on contract to date:
Contract price
Total estimated cost
Net
Billings to date
Costs in excess of billings
12.
Contact price
Estimated cost:
Cost incurred
Cost to complete
20%
P160,000
P10,000
0.0625
P160,000
P4,250,000
4,000,000
4,250,000
(
250,000)
4,000,000
3,600,000
P 400,000
P18,000,000
5,400,000
10,800,000
16,200,000
Estimated gross profit
% of completion (P5,400,000 / 16,200,000)
Gross profit realized in 2013
1,800,000
33 1/3%
P 600,000
13.
Contact price
Gross profit rate
Estimated gross profit
% of completion (P5,400,000 / 16,200,000)
Gross profit realized in 2013
P100,000,000
25%
25,000,000
50%
P 12,500,000
14.
15.
The fee received by contractor’s fee is P12,000,000 (1% of the bid price of P1.2 Billion).
20% Down payment on contract price:
Total
P192,000 x .20
17,500 x .20
87,500 x .20
49,700 x .20
151,000 x .20
Billing on balance, less applied down payment:
(P192,000 x .80 x 0.05) – (P38,400 x 0.05)
( 17,500 x .80 x 0.75) – ( 3,500 x 0.75)
( 87,500 x .80 x 0.80) – ( 17,500 x 0.80)
( 49,700 x .80 x 0.55) – ( 9,940 x 0.55)
( 151,000 x .80 x 0.35) – ( 30,200 x 0.35)
Total
Total billing made for large jobs
16.
Income recognized to date, 12/31/2013
Divided by percent completed
Total estimated gross profit
Add: Total estimated cost
Total contract price
Less: estimated Cost as of 12/31/2011
Estimated Gross Profit at 12/31/2011
Percent completed thru 12/31/2011 (P500,000 / 2,500,000)
17.
Construction in Progress:
Cost incurred to date,2012
Gross profit (loss) earned to date, 2012
(3,375,000 – 3,250,000)
Balance as of December 31,2012
P38,400
3,500
17,500
9,940
30,200
P5,760
7,875
42,000
16,401
31,710
P99,540
103,746
P203,286
P1,200,000
60%
2,000,000
8,000,000
10,000,000
7,500,000
2,500,000
20%
P2,625,000
(
125,000)
2,500,000
Less: Contract billings, 2012 (3,250,000 x 75%)
Current asset
2,437,500
P 62,500
18.
2012
Contract price
Estimated costs:
Cost incurred to date
Estimated costs to complete
Total
Estimated Gross profit
Percentage of completion
Gross profit earned this year (225,000)
2013
Contract price
Estimated costs:
Cost incurred to date
Estimated costs to complete
Total
Estimated Gross profit (loss)
Percentage of completion
Gross profit (loss) to date
Gross profit earned in prior yr.
Gross profit (loss) earned
This year (P429,000)
Project A
Project B
Project C
P2,900,000 P3,400,000 P1,700,000
1,680,000
1,120,000
2,800,000
100,000
60%
P60,000
1,440,000
1760,000
3,200,000
200,000
45%
P90,000
320,000
960,000
1,280,000
420,000
25%
Project A
Project B
Project C
Project D
P2,900,000 3,400,000 P1,700,000 P2,000,000
2,640,000
-02,640,000
260,000
100%
260,000
60,900
2,120,000
1,360,000
3,480,000
(80,000)
(80,000)
90,000
1,183,000
117,000
1,300,000
400,000
91%
364,000
105,000
560,000
1,040,000
1,600,000
400,000
35%
140,000
-0-
P200,000
P(170,000)
P259,000
P140,000
2012
P255,000
120,000
P135,000
2013
P429,000
120,000
P309,000
Gross profit earned each year
Operating expenses
Total comprehensive income
19. Progress billing (P2,500,000 x 30%)
Less: Construction in Progress
Costs incurred to date
Gross profit recognized:
Contract price
Total costs (P1,560,000 + 440,000)
Gross profit
% of completion (P440,000/2,000,000)
Current asset
750,000
440,000
2,500,000
2,000,000
500,000
22%
110,000
550,000
P200,000
20. Using the formula under the percentage of completion method the computation is:
2012
2013
Contract price
P9,600,000
P10,800,000
Estimated costs:
Cost incurred to date
4,920,000
8,640,000
Estimated costs to complete
4,920,000
2,160,000
Total
940,000
10,800,000
Loss recognized to date
(240,000)
(720,000)
Loss recognized in prior year
(240,000)
Loss recognized this year
P(240,000)
P(480,000)
21. Percentage of completion based on cost incurred to date:
Construction in progress
P24.5 million = 35%
Divided by contract price
70.0 million
Therefore, estimated cost to complete of P31.85 million is equal to 65%
Total estimated cost (P31.85 million / 65%)
Estimated cost to complete
Actual cost incurred in 2013
P49 million
31.85 million
P17.15 million
22. Compute first the gross profit (loss) to be recognized each year as follows:
2011
2012
Contract price
P975,000
975,000
Less: Cost incurred to date
75,000
600,000
Estimated cost to complete
675,000
400,000
Total estimated cost
750,000
1,000,000
Estimated gross profit
225,000
(25,000)
Percentage of completion
10%
60%
Construction in progress net of billings – 2012:
Cost incurred to date – 2012
Loss recognized in 2012
Construction in Progress
Less: Billings to date (P150,000 + 550,000)
Due to JG Inc.
23. Gross profit earned in 2012
2011
Revenue (P975,000 x 10%)
Cost incurred (actual cost)
Gross profit
Gross profit
To date
P97,500
75,000
P22,500
2013
P975,000
1,050,000
1,050,000
(75,000)
100%
P600,000
( 25,000)
575,000
700,000
P(125,000)
Gross profit
recognized in Prior
Years
P -
Gross profit
recognized This
Year
P97,500
75,000
P22,500
2012:
Revenue (P975,000 x 60%)
Cost (revenue + loss)
Gross profit (loss)
P585,000
610,000
P(25,000)
P97,500
75,000
P22,500
24. Percentage of completion (P61,250 / 183,750)
Estimated gross profit (P31,500 / 33.33%)
Total estimated cost (61,250 + 122,500)
Contract price
Construction in progress (P31.300 + 61,250)
Less: Billings (278,250 x 40%)
Due to
25. Gross profit recognized in 2012:
Contract price
Cost incurred to date
Estimated cost to complete
Total estimated cost
Estimated gross profit
Percentage of completion
Gross profit earned - 2012
Gross profit recognized in 2013
Contract price
Cost incurred to date
Estimated cost to complete
Total estimated cost
Estimated gross profit
Percentage of completion
Gross profit recognized to date
Gross profit earned in prior years
Gross profit recognized this years
Total gross profit recognized in 2013
33.33%
P94,500
183,750
P278,250
P92,750
111,300
P(18,550)
Contract 1
P1,800,000
450,000
450,000
900,000
900,000
50%
P450,000
Contract 1
P1,800,000
840,000
210,000
1,050,000
P750,000
80%
600,000
450,000
P150,000
Contract 2
P1,350,000
262,500
487,500
750,000
600,000
35%
P210,000
Contract 2
P1,350,000
540,000
360,000
900,000
450,000
60%
270,000
210,000
P60,000
26. Total cost incurred to date (P840,000 + 540,000 )
Total gross profit to date (P600,000 + 270,000 ++ 432,000)
Construction in Progress, December 31,2013
27.
Contract price
Cost incurred to date
P487,500
535,000
P(47,500)
2009
P1,000,000
280,000
Contract 3
P2,700,000
540,000
960,000
1,500,000
1,200,000
36%
432,000
P432,000
P642,000
P1,920,000
1,302,000
P3,222,000
2010
P1,000,000
600,000
Estimated cost to complete
Total estimated cost
Estimated gross profit
Percentage of completion
Gross profit earned to date
Gross profit earned in prior year
Gross profit recognized this years
520,000
800,000
200,000
35%
70,000
P70,000
200,000
800,000
200,000
75%
150,000
70,000
P80,000
28. Gross profit earned to date – 2012
Cost incurred to date
Construction in progress- 2012
Less: Billings to date
Construction in progress net of billings
P150,000
600,000
750,000
400,000
P350,000
29. Cost incurred to date- 2012
Less: Billings to date
Construction in progress net of billings , Dec.31,2012
P600,000
400,000
P200,000
30. Total contract price after change order
Total cost incurred to date after change order
Total estimated costs to complete after change order
Total estimated cost
Estimated gross profit
Percentage of completion (P8,475,000 /36,875,000)
Gross profit earned in 2013
P40,825,000
8,475,000
28,400,000
36,875,000
3,950,000
22.9830%
P 907,828