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 (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
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
P 520,000
264,000
192,000
136,000
2017
2018
2019
2020
Required:
How much is the realized gross profit (loss) in 2019?
Estimated cost each year to complete
P 544,000
312,000
152,000
-
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
-0Billing 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
-0How much income should BBC have recognized on this contract for the year ended 2020?