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NAME:
Professor:
1.
Second Period- Quiz 2
Chapter 7: Construction Contracts
Section:
Date:
Score:
The primary issue​ ​in 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
c. a combination of a and b
b. cost plus contract.
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-to-cost” 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. entered 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
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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 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. entered 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:
20x1
20x2
20x3
Costs incurred to date
2,400,000
4,500,000
6,000,000
Estimated costs to complete
3,600,000
1,500,000
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 the “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
8. How much is the gross profit recognized in 20x3?
a. 1,000,000
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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​.
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
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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 the percentage of completion method?
a. 4,000,000
b. 6,000,000
c. 14,000,000
d. 0
16. On January 1, 20x1, ABC Co. entered 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 cost of construction recognized as expense in 20x1?
a. 175,000
b. 375,000
c. 300,000
d. 285,000
17. PFRS 15 requires how many steps in recognizing revenue from contracts with
customers?
a. 2
c. 5
b. 3
d. 7
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Use the following information for the next two cases (18 and 19)
SOLUTION Construction Co. entered into a fixed price contract for the construction of a
building for PROBLEM, Inc. SOLUTION determines the stage of completion of construction
contracts using the “cost-to-cost” method.
The estimated total costs of the contract are as follows:
Estimated costs of design and technical
assistance that are directly related to the contract
800,000
Estimated costs of design and technical
assistance that are not directly related to a
200,000
specific contract (properly allocated)
Estimated costs of materials to be used in the
22,000,000
construction
Estimated costs of construction labor
Estimated costs of rectification and guarantee
work, including expected warranty costs
Estimated administrative costs expected to be
reimbursed in accordance with contractual
agreement
Estimated insurance costs during construction
Estimated construction overheads
Estimated marketing costs for selling
condominium units
Estimated total contract costs
11,200,000
1,200,000
520,000
80,000
4,000,000
​ 400,000
40,400,000
The following were the actual costs incurred by SOLUTION during the first year of the
construction:
Costs of design and technical assistance
that are directly related to the contract
400,000
Costs of design and technical assistance
that are not directly related to a specific
100,000
contract (properly allocated)
Costs of materials used in the construction 12,000,000
Costs of construction labor
6,000,000
Administrative costs expected to be
reimbursed in accordance with contractual
agreement.
880,000
Administrative costs not expected to be
reimbursed
120,000
Research and development costs for which
reimbursement is not specified in the
6,800,000
contract
Insurance costs during construction
60,000
Construction overheads
960,000
Marketing costs
Total costs incurred to date
800,000
28,120,000
18. What is the total cost incurred to date?
a. 21,320,000b. 28,000,000
c. 20,000,000d. 20,400,000
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19. What is the percentage of completion of the contract as of the end of the first year?
a. 42%
b. 45%
c. 50%
d. 51%
Use the following information for the next six cases (20-25):​
As of 2 February 2020, approximately 14,642 cases have been confirmed infected for novel
coronavirus of which 14,462 cases are from Mainland China. Wuhan, China was totally
locked down and the Government of China started building an emergency specialty field
hospital called “Huoshenshan Hospital” from 23 January 2020 to 2 February 2020 and
operation scheduled to start by 3 February 2020. The Philippine’ government was
mesmerized by the fast construction of the said hospital for only just 10 days to complete.
The Philippine’ government started to build a 2-storey public hospital to treat coronavirus
as the outbreak is expected to last for four years. Chongchingchong Construction was
hired to finish the construction in 2022. Chongchingchong Construction has consistently
used the percentage-of-completion method of accounting for construction-type contracts.
During 2020, Chongchingchong Construction started work on a P100,000,000 fixed-price
construction contract that will be completed in 2022. Chongchingchong accounting
records disclosed the following:
Cumulative contract costs incurred
Estimated total cost at completion
December 31
2020
2021
P 30,900,000 P 64,080,000
61,800,000 80,100,000
20. What is the percentage of completion as of 2020?
a. 45%
b. 37%
c. 52%
d. 50%
21. What is the gross profit/loss for the year 2020?
a. Php 34.351 Million
b. Php 30.520 Million
c. Php 34.550 Million
d. Php 19.100 Million
22. What is the contract cost incurred for 2021?
a. Php 33.18 Million
b. Php 64.08 Million
c. Php 80.10 Million
d. Php 18.30 Million
23. What is the percentage completed for 2021?
a. 55.15%
b. 30%
c. 32%
d. 23.13%
24. The revenue recognized to date in 2021?
a. Php 33.00 Million
b. Php 83.79 Million
c. Php 30.00 Million
d. Php 80.00 Million
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25. What is the revenue recognized for the year 2021?
a. Php 30.00 Million
b. Php 31.79 Million
c. Php 81.80 Million
d. Php 83.79 Million
“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:
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 = 4​ 5%
4. Solution:
Percentage of completion = (6M – 2M – 200K) ÷ 10M
Percentage of completion = ​(3.8M ÷ 10M) =​ ​38%
38% x 20M =​ 7.6M
5. A ​Solution:
Total contract price
(a)
Costs incurred to date
Estimated costs to complete
(b)
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
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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
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
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
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 (a)​
Contract revenue in prior yrs.
Contract revenue for the year
Cost of construction (b)​
Profit (loss) for the year
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)
​
“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​).
(b) ​ ​
12. D (see solutions below)
13. D (see solutions below)
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14. C
Solutions:
Contract revenue to date
Contract revenue in prior years
Contract revenue for the year
Cost of construction (b)​
Profit (loss) for the year
(a)
​
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)
​
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:
Project
Total contract price
(a)
Costs incurred to date
Estimated costs to complete
(b)
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
CIP – ​B
Costs incurred
4,000,000
5,000,000
Profit
2,000,000
3,000,000
8,000,000 *
6,000,000
*Since project ​B i​ s 100% complete, it is assumed that the completed project was turned
over to the customer.
16. C ​Solution:
Total contract price
(a)
Costs incurred to date
Estimated costs to complete
1,000,000
300,000
500,000
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(b)
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
17.
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)
17. C
18. D (28.12M – .120M - 6.8M - .8M) = ​20.4M
19. D (28.12M – .120M - 6.8M - .8M) ÷ (40.4M - .4M) = ​51%
20. D (30.9M/61.8= ​50%
21. D (100M - 61.8M)* 50% = ​19.1M
22. A (64,080,000- 30,900,000)= ​33.18M
23. B (2021 POC= 80%) - (2020 POC= 50%) = ​30%
24. D (100M x 80%)= ​80M
25. A (80M - 50M) = ​30M
800,000
200,000
37.50%
75,000
75,000
1,000,000
37.50%
375,000
375,000
(300,000)
75,000