LONG-TERM CONSTRUCTION CONTRACTS (2)
Test I – Multiple Choice (Theory)
01. In accounting for a long term construction contract using the percentage of completion method, the progress billings
on contract account is a:
a. Contra current asset account
b. Contra noncurrent asset account
c. Noncurrent liability account
d. Revenue account
02. How should balances of progress billings and construction in progress be shown at reporting dates prior
03. prior to the completion of a long-term contract?
a. Progress billings as deferred revenue, construction in progress as a deferred expense
b. Progress billings as revenue, construction in progress as inventory
c. Net, as current assets if debit balance and current liability if credit balance.
d. Net, as income from construction if credit balance, and loss from construction if debit balance
03. Which of the following would be used in the calculation of the net profit recognized in the third and
final year of a construction contract which is accounted for using the percentage of completion method?
Contract price
Actual total costs
Income previously
recognized
a.
Yes
Yes
No
b.
Yes
Yes
Yes
a.
Yes
No
Yes
a.
No
No
Yes
04. When should an indicated loss on a long term contract be recognized under the hybrid contract method and the
percentage of completion method, respectively?
Zero profit
Percentage of Completion
a. Immediately
Immediately
b. Immediately
Over the life of the project
c. Completion of contract
Over the life of the project
d. Completion of contract
Immediately
05. A company uses the percentage of completion method to account for a four-year construction contract. Which of
the following would be used in the calculation of the income recognized in the first year?
Progress billing
Percentage of Completion
a. No
No
b. No
Yes
c. Yes
No
d. Yes
Yes
06. In computing the percentage of completion ratio, under the cost to cost method, actual costs incurred should exclude:
a. Costs of materials used in construction
b. Costs of hiring equipment
c. Costs of design and technical assistance
d. Costs of materials purchased in advance
07. The excess of Construction in Progress account over the Contract billings is treated as:
a. Current liability
b. Current asset
c. Other asset
d. Noncurrent liability
08. Under PAS 11, Contraction Contracts, when it is probable that the total contract costs on a fixed price contract will
exceed total contract revenue, the expected loss should be
a. Se off against on other contract when available.
b. Recognized as an expense immediately, unless revenue to-date exceed costs to-date.
c. Apportioned to the years of the contract according to the percentage of completion method.
d. Recognized as an expense immediately.
09. Before the year of completion, under the percentage of completion method, the year-end balance of the Construction
in Progress account is equal to:
a. Cost incurred to date
b. Cost incurred this year
c. Cost incurred to date plus gross profit earned to date
d. Gross profit earned to date
10. The calculation of the income recognized in the third year of the five-year construction contract accounted for using
the percentage of completion method includes the ratio of
a. Total costs incurred to-date to total estimated costs.
b. Total costs incurred to-date to total billings to-date.
c. Cost incurred in year 3 to total estimated costs.
d. Cost incurred in year 3 to total billings to-date.
Test II - Problems
01. The Matibay Construction Corporation uses the percentage-of-completion method of recognizing income from
long-term construction contracts. In 2018, Matibay entered into a fixed-price contract to construct a bridge for
P30,000,000. Estimated costs to complete the construction and contract costs incurred up to 2020 were
as follows:
Cumulative
Estimated costs
Costs incurred
to complete
As of December 31, 2018………..P 2,000,000
P16,000,000
As of December 31, 2019……….. 11,000,000
11,000,000
As of December 31, 2020……….. 20,000,000
4,000,000
What is the percentage of completion during the year 2020?
a. 25.00%
b. 33.33%
c. 50.00%
d. 83.33%
02. In 2019, the Kenetics Construction Company started a construction job with a total contract price of P600,000.
Any costs incurred are expected to be recoverable. The job was completed on December 31, 2020.
Additional data are as follows:
2019
2020
Actual costs incurred
P225,000
P255,000
Estimated remaining costs
225,000
Billed to client
240,000
360,000
Collected from client
225,000
375,000
Under the percentage of completion method, what amount of gross profit should be realized in 2019?
a. P150,000
b. P120,000
c. P75,000
d. P60,000
03. Using the same information in no. 2 and under the percentage of completion method, what amount of gross profit
should be realized in 2020?
a. P120,000
b. P75,000
c. P45,000
d. P0
04. Lakeshore Construction Company has consistently used percentage of completion method of recognizing income.
During 2019, the company entered into a fixed-price contract to construct an office building for P3,000,000.
Information relating to the contract is as follows:
2019
2020
Percentage of completion
20%
60%
Estimated total cost at completion
P2,250,000
P2,400,000
Income recognized (cumulative)
150,000
360,000
How much costs were incurred in 2020?
a. P600,000
b. P960,000
c. P990,000
d. P1,440,000
05. The Gamboa Construction Company started work on three job sites during the current year. Any costs
incurred are expected to be recoverable. Data relating to the three jobs are given below:
Contract Cost
Site
price
incurred
Batangas…….P500,000 P375,000
Laguna………. 700,000 100,000
San Fernando 250,000 100,000
Estimated costs
to complete
P400,000
100,000
Billings
on contract
P500,000
100,000
150,000
Collection
on contract
P500,000
100,000
100,000
What would be the amount of construction in progress to be reported on the year-end statement of financial
position if the percentage- of-completion method is used?
a. P765,000
b. P700,000
c. P265,000
d. P200,000
06. During 2020, Reach Construction started work on a P3,000,000 fixed-price construction contract. Any costs
incurred are expected to be recoverable. The accounting records disclosed the following data for the year
ended December 31, 2020:
Costs incurred……………………………………………….P 930,000
Estimated cost to complete………………………………… 2,170,000
Progress billings…………………………………………….. 1,100,000
Collections…………………………………………………… 900,000
How much loss should Reach Construction have recognized in 2020 if the percentage- of-completion method
is used?
a. P100,000
b. P50,000
c. P30,000
d. P0
07. Daimler Construction Company uses the percentage –of-completion method of accounting. During 2020,
Daimler contracted to build an apartment house for an individual for P10 million. The company estimated that
total costs would amount to P8,000,000 over the period of construction costs during 2020. In connection with this
contract, Daimler incurred P2,000,000 of construction cost during 2020. Daimler billed and collected P1.5 million
from the client in 2020. How much gross profit should Daimler recognize in 2020?
a. P300,000
b. P250,000
c. P187,500
d. P125,000
08. In 2020, AJD Construction Co. was contracted to build Village Company’s private road network for P100
million. The project was estimated to be completed in two years, and the contract provided for:
(1) 5% mobilization fee (to be deducted from the last billing) payable within 15 days after signing of the contract,
(2) 10% retention provision on all billings, and
(3) Payment of progress billings within 10 days from acceptance.
AJD, which uses the percentage-of-completion method of accounting, estimated a 25% gross margin
on the project. By the end of 2020, AJD had presented progress billings corresponding to 50% completion. All
of the progress billing presented in 2020 were accepted, except the last one for 10% which was accepted on
January 7 2021. With the exception of one bill for 8% which was due on January 7, 2021, off of the billings accepted
in 2020 were settled. Payments made by Village Company in 2020 amounted to:
a. P33,800,000
b. P38,500,000
c. P 40,000,000
d. P45,000,000
09. 7ME Construction Corporation has the following date for large jobs in its Jobs in Progress account (000 omitted):
Project No.
101
102
103
104
105
Actual Cost
P 8,756
11,457
53,865
22,800
44,500
P141,378
=======
Estimated Total Costs
P172,800
14,875
61,250
39,760
122,310
P410,995
=======
Contract Price
P192,000
17,500
87,500
49,700
151,000
P497,700
=======
% of Completion
5
75
80
55
35
The company accounts for its large jobs by the percentage of completion method. Billings are done as follows:
(a) 20% down payment upon contract signing; and (b) balance is billed according to percentage of completion,
less an application of the down payment which is also according to percentage of completion. How much total
billings were made by the company?
a. P203,286
b. P99,540
c. P151,413
d. P189,266
10. Using the same information in no. 9, how much total revenue should be recognized by the company for the
period under consideration?
a. P120,060
b. 172,910
c. P146,485
d. P219,727