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Chapter 7 Construction Contracts
accountancy (University of the Visayas)
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Chapter 7
Construction Contracts
PROBLEM 1: TRUE OR FALSE
1. FALSE
6. TRUE
2.
FALSE
7.
TRUE
3.
FALSE
8.
FALSE
4.
TRUE
9.
FALSE
5.
TRUE
10.
TRUE
PROBLEM 2: FOR CLASSROOM DISCUSSION
1.
D
2.
D
3.
A
4.
C
5.
D
6.
C
7.
D
8.
C
9.
D
10. C
11. C
12. Solutions:
Requirement (a):
July 1 to
Dec. 31,
20x1
Construction in progress
Cash (or other appropriate accounts)
120,000
120,000
to record the contract costs
The percentage of completion as of December 31, 20x1 is computed as
follows:
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➢
The gross profit earned in 20x1 is computed as follows:
Total contract price
Costs incurred to date
Estimated costs to complete
Estimated total contract costs (see ‘bill of materials’)
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
(a)
(b)
➢
600,000
120,000
240,000
360,000
240,000
33 1/3%
80,000
80,000
The revenue and cost of construction in 20x1 are computed as
follows:
Total contract price
Multiply by: Percentage of completion
Revenue to date
Less: Revenue recognized in previous yrs.
Revenue for the year
Cost of construction (squeezed)
Gross profit for the year (see computation above)
600,000
33 1/3%
200,000
200,000
(120,000)
80,000
The year-end adjusting entry to recognize revenue is as follows:
Dec. 31, Cost of construction
120,000
20x1
Construction in progress (gross profit)
80,000
200,000
Revenue
Dec.
31,
20x1
Receivable (600K x 33 1/3%)
Progress billings (given)
200,000
180,000
20,000
Contract liability
to record the billing to the customer
“Receivable” is debited instead of “Contract asset” because Contractor Co.
has an unconditional right to consideration for progress made on the
contract.
The excess of the receivable (i.e., unconditional right to consideration) over the
amount invoiced to the customer (i.e., progress billing) is recognized as a
contract liability.
Contract liability – is an entity’s obligation to transfer goods or services to a
customer for which the entity has received consideration (or the amount is
due) from the customer.
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Dec.
31,
20x1
Cash
Receivable
60,000
60,000
to record the collection on the billing
Requirement (b):
Contractor Co.
Statement of financial position
As of December 31, 20x1
Current assets
Receivable (200,000 - 60,000)
Contract asset*
140,000
20,000
Total current assets
160,000
Current liabilities
Contract liability (see journal entries above)
20,000
Total current liabilities
20,000
*Construction in progress (120,000 + 80,000)
Progress billing
Contract asset
200,000
(180,000)
20,000
Contractor Co.
Statement of profit or loss
For the year ended December 31, 20x1
Revenue
Cost of construction
200,000
(120,000)
80,000
-
Gross profit
Other operating expenses
Profit for the year
80,000
13. Solutions:
(a)
(b)
Total contract price
Costs incurred to date
Estimated costs to complete (squeeze)
Estimated total contract costs
Expected profit (loss)
Multiply by: % of completion (a) ÷ (b)
Profit (loss) to date
Profit recognized in prior years
20x1
9,000,000
3,900,000
3,900,000
7,800,000
1,200,000
50%
600,000
-
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20x2
9,000,000
6,300,000
1,800,000
8,100,000
900,000
77.7778%
700,000
(600,000)
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Profit (loss) for the year
Total contract price
Multiply by: % of completion
Contract revenue to date
Contract revenue in prior years
Contract revenue for the year
Cost of construction (squeeze)
Profit (loss) for the year
600,000
100,000
20x1
9,000,000
50%
4,500,000
4,500,000
(3,900,000)
600,000
20x2
9,000,000
77.7778%
7,000,000
(4,500,000)
2,500,000
(2,400,000)
100,000
20x1
3,900,000
3,900,000
(3,900,000)
-
20x2
6,300,000
(3,900,000)
2,400,000
(2,400,000)
-
14. 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
to the “Cumulative contract costs incurred.”
Equal to the costs incurred during the year. The cost incurred in 20x2 is
computed as follows: (6,300,000 – 3,900,000) = 2,400,000.
(a) Equal
(b)
15. Solution:
No revenue shall be recognized during the course of construction. Revenue
(and cost of construction) will be recognized only when the construction is
complete and legal title over the constructed building is transferred to the
customer.
16. Solutions:
➢ The costs incurred to date include the cost of an uninstalled materials (i.e.,
elevators).
➢ Because all the conditions under PFRS 15 are met, the entity shall adjust
its measure of progress to recognize revenue only to the extent of the
costs of the uninstalled elevators. The cost of goods sold recognized
in 20x1 will also include this cost. Consequently, the entity recognizes zero
profit from the elevators in 20x1.
Percentage of
completion
=
Total costs incurred to date
Estimated total contract costs
= (500,000 costs incurred, excluding cost of elevator) ÷ (2.5M ‘other costs’
only, excluding cost of elevator)
Percentage of completion = 20%
Requirement (a): Revenue in 20X2
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[(5M transaction price – 1.5M cost of elevator) x 20%] + 1.5M cost of elevator
= ₱2,200,000 revenue in 20X2
Requirement (b): Profit in 20X2
Cost of goods sold in 20X2
[(2.5M ‘other costs’ only, excluding cost of elevator) x 20%] + 1.5M cost of
elevator = ₱2,000,000 cost of goods sold in 20X2
Profit in 20X2 = 2.2M – 2M = ₱200,000
17. Solutions:
Analysis:
Since the additional goods or services to be provided in the modified contract
are not distinct, they are essentially a part of a single performance obligation
that is only partially satisfied. Therefore, the contract modification is accounted
for as if it were a part of the existing contract.
Accordingly, the effect of the contract modification on the transaction price, and
on the entity’s measure of progress towards complete satisfaction of the
performance obligation, is recognized as an increase or decrease in revenue
at the date of the contract modification. The adjustment to revenue is
made on a cumulative catch-up basis.
The percentage of completion is computed as follows:
(a)
(b)
Costs incurred to date
Estimated costs to complete
Estimated total contract costs (given)
Percentage of completion (a) ÷ (b)
20x1
420,000
ignored
700,000
60%
Contract
modification date
in 20x2
420,000
ignored
820,000 (1)
51.2%
(1)
The revised estimated total contract costs as of the date of contract
modification in 20x2 is computed as (700K original estimate of total contract
costs + 120K increase due to the contract modification in 20x2) = 820K.
The revenue in 20x1 and the cumulative catch-up adjustment to
revenue in 20x2 are computed as follows:
20x1
Total contract price
Multiply by: % of completion
Revenue to date
Less: Revenue recognized in prior yrs.
1,000,000
60%
600,000
-
Contract
modification
date in 20x2
1,350,000 (2)
51.2%
691,200
(600,000)
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Revenue in 20x1 /
Cumulative catch-up adjustment to
revenue in 20x2
Cost of construction
Gross profit for the year /
Cumulative catch-up adjustment to gross
profit in 20x2
600,000
(420,000)
91,200
(
- )
180,000
91,200
(2) The bonus is included in the transaction price only in 20x2 when it became
highly probable that the entity will receive the bonus. The revised transaction
price on contract modification date in 20x2 is computed as (1M contract price
+ 150,000 contract modification + 200,000 bonus = 1,350,000).
PROBLEM 3: EXERCISES
1.
Solutions:
Total contract price
(a)
Costs incurred to date
Estimated costs to complete (squeeze)
(b) Estimated total contract costs
Expected profit (loss)
Multiply by: % of completion (a) ÷ (b)
Profit (loss) to date
Profit recognized in prior years
Profit (loss) for the year
Total contract price
Multiply by: % of completion
Contract revenue to date
Contract revenue in prior years
Contract revenue for the year
Cost of construction (squeeze)
Profit (loss) for the year
20,000,000
2,000,000
14,000,000
16,000,000
4,000,000
12.50%
500,000
500,000
20,000,000
12.50%
2,500,000
2,500,000
(2,000,000)
500,000
Solutions:
Total contract price
(a)
Costs incurred to date
Estimated costs to complete (given)
(b) Estimated total contract costs
Expected profit (loss)
Multiply by: % of completion (a) ÷ (b)
Profit (loss) to date
Profit recognized in prior years
Profit (loss) for the year
2.
Total contract price
Multiply by: % of completion
4,500,000
1,350,000
2,700,000
4,050,000
450,000
33 1/3%
150,000
150,000
4,500,000
33 1/3%
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Contract revenue to date
Contract revenue in prior years
Contract revenue for the year
Cost of construction (squeeze)
Profit (loss) for the year
1,500,000
1,500,000
(1,350,000)
150,000
3. Solutions:
Requirement (a):
Total contract price
(a)
Costs incurred to date
Estimated costs to complete (given)
(b) Estimated total contract costs
Expected profit (loss)
Multiply by: % of completion (a) ÷ (b)
Profit (loss) to date
Profit recognized in prior years
Profit (loss) for the year
1,200,000
590,000
410,000
1,000,000
200,000
59%
118,000
118,000
Total contract price
Multiply by: % of completion
Contract revenue to date
Contract revenue in prior years
Contract revenue for the year
Cost of construction (squeeze)
Profit (loss) for the year
1,200,000
59%
708,000
708,000
(590,000)
118,000
Requirement (b):
Costs incurred
Profit recognized
Construction in progress
590,000
118,000
708,000
4. Solutions:
Requirement (a):
Contract revenue for the year (equal to cost incurred) 590,000Cost
of construction (squeeze)
(590,000)
Profit (loss) for the year
Requirement (b):
Costs incurred
Profit recognized
Construction in progress
590,000
590,000
5. Solutions:
Requirement (a):
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Contract revenue for the year
Cost of construction
Profit (loss) for the year
-
Requirement (b):
Costs incurred
Profit recognized
Construction in progress
6.
(a)
(b)
590,000
590,000
Solutions:
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 recognized in prior years
Profit (loss) for the year
Total contract price
Multiply by: % of completion
Contract revenue to date
Contract revenue in prior years
Contract revenue for the year
Cost of construction (squeeze)
Profit (loss) for the year
7.
20x1
6,000,000
2,250,000
2,250,000
4,500,000
1,500,000
50%
750,000
750,000
20x2
6,000,000
4,800,000
4,800,000
1,200,000
100%
1,200,000
(750,000)
450,000
20x1
6,000,000
50%
3,000,000
3,000,000
(2,250,000)
750,000
20x2
6,000,000
100%
6,000,000
(3,000,000)
3,000,000
(2,550,000)
450,000
20x1
2,250,000
2,250,000
(2,250,000)
-
20x2
6,000,000
(2,250,000)
3,750,000
(2,550,000)
1,200,000
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
(a) The contract revenue to date in 20x1 is equal to the ₱2,250,000 costs
incurred during that year. The contract revenue to date in 20x2 is equal to the
₱6,000,000 contract price because the construction is 100% complete.
(b) Equal
to the costs incurred during the year.
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8.
Solutions:
20x1
-
Contract revenue to date (a)
Contract revenue in prior years
Contract revenue for the year
Cost of construction (b)
Profit (loss) for the year
20x2
6,000,000
6,000,000
(4,800,000)
1,200,000
(a) 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 20x2 when the construction
is completed.
(b) The costs incurred during the construction period are deferred and
recognized in full only in 20x2 when the related revenue is recognized.
9.
Solutions:
Construction in progress, ending balances
Contract costs incurred to date (a)
Profit to date
Profit in previous years
Profit for the year
20x1
122,000
(105,000)
17,000
17,000
20x2
364,000
(297,000)
67,000
(17,000)
50,000
(a)
The contract costs incurred to date in 20x2 is computed as follows: (105,000 +
192,000 = 297,000).
Revenue for the year (squeeze)
Cost of construction (equal to costs incurred each yr.) (b)
Profit for the year
20x1
122,000
(105,000)
17,000
20x2
242,000
(192,000)
50,000
(b)
Under the ‘cost-to-cost’ method of measuring progress, the “cost of
construction” each year is equal to the contract cost incurred during the year.
Requirement (b):
Solution:
Progress billings, 20x2
Receivable, 20x2
Total collections
420,000
(300,000)
120,000
10. Solution:
The costs incurred to date are computed as follows:
(a)
(b)
Costs incurred to date (squeeze)
Estimated costs to complete
Estimated cost at completion (given)
20x1
978,750
ignored
6,525,000
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20x2
4,524,000
ignored
6,960,000
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(a) ÷ (b)
Percentage of completion (given)
15%
The costs of construction are computed as follows:
20x1
Costs incurred to date
978,750
Costs incurred in previous years
Costs incurred during the year
978,750
65%
20x2
4,524,000
(978,750)
3,545,250
The profits are computed as follows:
Total contract price (given)
(a) Costs incurred to date (ignored)
Estimated costs to complete (ignored)
(b) Estimated cost at completion (given)
Expected profit (loss)
Multiply by: % of completion (given)
Profit (loss) to date
Profit recognized in prior years
Profit (loss) for the year
20x1
8,700,000
20x2
8,700,000
6,525,000
2,175,000
15%
326,250
326,250
6,960,000
1,740,000
65%
1,131,000
(326,250)
804,750
11. Solution:
Contract price
Costs incurred during the year
Estimated costs to complete
Total expected contract costs
Expected loss
Contract 1
420,000
240,000
120,000
360,000
-
Contract 2
300,000
280,000
40,000
320,000
(20,000)
Answer: Red Hot Co. recognizes a loss of ₱20,000 in 20x1. The loss is
recognized as a provision for onerous contract in accordance with PAS 37.
12. Solution:
(a)
(b)
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 recognized in prior years
Profit (loss) for the year
Contract 1
420,000
240,000
120,000
360,000
60,000
66.67%
40,000
40,000
Contract 2
300,000
280,000
40,000
320,000
(20,000)
N/A
(20,000)
(20,000)
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