ACAFA 3257
Class Consultation – Long Term Construction Contracts
II - Performance Obligations
Cabalen Pools, Inc. constructs outdoor swimming pools for wealthy individuals. Recently it obtained
an order to build a three-lane swimming pool of 25 yards in length in the customer’s backyard. Under
the contract, Cabalen is also obligated to install a water heater and a filtration system, which are
necessary to make a swimming pool fully functional. Total price for the construction was P55,000.
Each of these smaller components would typically cost P40,000, P10,000, and P20,000 if installed
separately. Given the information above, how many performance obligations are included in this
contract?
Answers - Problem II
Number of performance obligations in the contract: 1.
IV - Timing of Revenue Recognition–Over Time or Point in Time
EE Construction is constructing a building for AJD, a condominium enterprise. Under the construction
agreement, if for any reason EE can’t complete construction, AJD would own the partially completed
building and could hire another construction company to complete the job. When should EE recognize
revenue: as the building is constructed, or after construction is completed?
Answer - Problem IV
A performance obligation is satisfied over time if at least one of the following three criteria is met:
1. The customer consumes the benefit of the seller’s work as it is performed,
2. The customer controls the asset as it is created, or
3. The seller is creating an asset that has no alternative use to the seller, and the seller can receive
payment for its progress even if the customer cancels the contract.
Under EE construction agreement with AJD, if for any reason
EE can’t complete construction, AJD would own the partially completed building. Therefore, criterion
2 is satisfied, and revenue should be recognized as the building is being constructed.
VI – Methods of Construction Accounting
Beavis Construction Company was the low bidder on a construction project to build an earthen dam for
P1,800,000. The project was begun in 20x4 and completed in 20x5. Cost and other data are presented
below:
Cost
incurred
during
the
year . . . . . . . . . . . . . . . . .
Estimated
costs
to
complete . . . . . . . . . . . . . . . . . .
Billings during the year . . . . . . . . . . . . . . . . .
......
Cash collections during the year . . . . . . . . . .
....
P
20x4
450,000
20x5
P1,100,000
1,200,000
400,000
0
1,400,000
300,000
1,500,000
Required: Compute the amount of gross profit recognized during 20x4 and 20x5.
1. Assume that Beavis uses the overtime (percentage-of-completion) method for revenue
recognition.
Answer - Problem VI
1. Input Measure - Percentage of Completion Method (Cost to Cost Method)
20X4:
Contract price
Actual costs to date
P 450,000
Estimated costs to complete
1,200,000
Total estimated project costs
Estimated total gross profit
Percentage of completion:
P450,000 / P,1650,000
Gross profit recognized
20X5:
Contract price
P 1,800,000
1,650,000
150,000
27.27%
P 40,905
P 1,800,000
Costs incurred:
20X4
20X5
P 450,00
1,100,000
Total cost
Total gross profit
Recognized in 20X4
Recognized in 20X5
1,550,000
250,000
40,905
P 209,095
2. Assume that Beavis uses the point-in-time (cost recovery) method for revenue recognition.
Answer - Problem VI
2. Input Measure - Cost Recovery Method
20X4: (all costs not yet recovered)
20X5:
Contract price
Costs incurred:
Total cost
Total gross profit
P -01,800,00
20X4
20X5
P 450,000
1,100,000
1,550,000
P 250,000
VIII - Input Measures: Overtime/Percentage-of-Completion (Cost-to-Cost) Method versus
Point-in-Time/Cost Recovery Method
DJD Builders has a fixed price contract to build a waiting shed. The initial amount of revenue agreed is
P528,000. At the beginning of the contract on January 1, 20x3 the initial estimate of the construction
costs is P480,000. By the end of 20x3 the estimate of the total costs has risen to P484,800.
During 20x4 the customer agrees to a variation with increases expected revenue from the contract by
P12,000 and causes additional costs of P7,200. At the end of 20x4 there are materials stored on site for
use during the following period which cost P6,000.
DJD Builders have decided to determine the stage of completion of the contract by calculating the
proportion that contract costs incurred for work to date bear to the latest estimated total contract costs.
The contract costs incurred at the end of each year (costs incurred to date), billings and collections for
each year were as follows:
Year
Direct and Allocable Costs to date
Billings
Collections
20x3
P126,048
P144,000
P120,000
20x4
370,080 (including materials in store)
240,000
228,000
20x5
492,000
156,000
192,000
Required:
1. Prepare the journal entries, under:
a. Over Time/Percentage-of-completion method using cost-to-cost method
ANSWER - a. Input Measure – Percentage of completion – (cost-to-cost method)
The following analysis is to determine the percentage of completion:
20x3
Contract price:
Initial amount of contract…………...
Variation………………………………..
Total contract price……………………..
Costs incurred each year………………
Add: Costs incurred in prior years…….
Actual costs incurred to date (1)…..…
Add: Estimated costs to complete…..
Total estimated costs (3)……..…………
Estimated gross profit……………………
Percentage of completion (1) / (3)
20x4
P528,000
_______P528,000
P 126,048
_______P126,048
_358,752
P484,800
P 43,200
26%
20x5
P528,000
__12,000
P540,000
*P244,032
_126,048
*P370,080
_121,920
P492,000
P 48,000
**74%
P528,000
__12,000
P540,000
P121,920
_370,080
P492,000
_______P492,000
P 48,000
100%
* including the P7,200 additional costs in 20x4.
** it should be noted that the percentage of completion for 20x4 is calculated by deducting the P6,000 of materials held for the following period from
the costs incurred up to that year end, i. e., P370,080 – P6,000 = P364,080, P364,080 / P492,000 = 74%.
The revenue, expenses (costs) and profit will be recognized in profit or loss as follows:
-
Recognized in
current year
P 137,280
126,048
P 11,232
To date
P 399,600
_364,080
P 35,520
Recognized in
prior years
P 137,280
_126,048
P 11,232
Recognized in
current year
P 262,320
238,032
P 24,288
To date
P 540,000
_492,000
P 48,000
Recognized in
prior years
P 399,600
_364,080
P 35,520
Recognized in
current year
P 140,400
_127,920
P 12,480
20x3
Revenue (P528,000 x 26%)
Costs/Expenses (P484,800 x 26%)
Gross Profit (P43,200 x 26%)
To date
P 137,280
126,048
P 11,232
20x4
Revenue (P540,000 x 74%)
Costs/Expenses (P492,000 x 74%)
Gross Profit (P48,000 x 74%)
20x5
Revenue (P540,000 x 100%)
Costs/Expenses (P492,000 x 100%)
Gross Profit (P48,000 x 100%)
Recognized in
prior years
Alternatively, the gross profit recognized each year may also be computed as follows:
20x3
Contract price:
Initial amount of contract………….......
Variation……………………………………
Total contract price…………………………
Costs incurred each year………………….
Add: Costs incurred in prior years………..
Actual costs incurred to date (1)…..…….
Add: Estimated costs to complete………
Total estimated costs (3)……..…………….
Estimated gross profit………………………
Percentage of completion (1) / (3)……...
Gross profit to date………………………….
Less: Gross profit in prior years…………….
Gross profit in current year -% of completion
Gross profit in current year –cost recovery method
P528,000
_______P528,000
P126,048
_______P126,048
_358,752
P484,800
P 43,200
____26%
P 11,232
_______P 11,232
P
0
20x4
P528,000
__12,000
P540,000
P240,032
_126,048
P370,080
_121,920
P492,000
P 48,000
____74%
P 35,520
___11,232
P 24,288
P
0
20x5
P528,000
12,000
P540,000
P121,920
_370,080
P492,000
_______P492,000
P 48,000
___100%
P 48,000
__35,520
P 12,480
P 48,000
Following are the entries for the years 20x3 to 20x5:
Percentage of Completion Method
20x3
20x4
20x5
1. To record costs incurred:
Construction In Progress*………......
Materials Inventory…………………..
Cash, payables, etc……………..
126,048
127,920
126,048
2. To record progress billings:
Accounts receivable………………..
Progress billings*.………………….
144,000
3. To record collections:
Cash………………………………….....
Accounts receivable……………
120,000
4. To recognize Revenue, Costs
and Gross Profit:
Construction Expenses………………
Construction in Progress*..………....
Revenue from Construction......
238,032
6,000
240,000
156,000
144,000
240,000
228,000
156,000
192,000
120,000
126,048
11,232
6,000
121,920
244,032
228,000
238,032
24,288
192,000
127,920
12,480
137,280
262,320
5. To close Construction In Progress**
and Progress Billings account:
Progress billings………………………
Construction In Progress……….
* The term “Contract account” may alternatively be used.
** If “Contract account” is used then no entry is required for No. 5.
140,400
540,000
540,000
b. Point-in-Time/Cost recovery method (also known as zero-profit approach)
ANSWER - b. Input Measure – Cost Recovery Method
The following table shows the data needed for further analysis:
20x3
Contract price:
Initial amount of contract…………...
Variation………………………………..
Total contract price……………………..
Costs incurred each year………………
Add: Costs incurred in prior years…….
Actual costs incurred to date……....…
Add: Estimated costs to complete…..
Total estimated costs ….……..…………
20x4
P528,000
_______P528,000
P126,048
_______P126,048
____ _?
P
?
20x5
P528,000
__12,000
P540,000
P244,032
_126,048
P370,080
____ _?
P
?
P528,000
__12,000
P540,000
P121,920
_370,080
P492,000
_______P492,000
The revenue, expenses (costs) and profit will be recognized in profit or loss as follows:
-
Recognized in
current year
P 126,048
126,048
P
0
To date
P 364,080
_364,080
P
0
Recognized in
prior years
P 126,048
126,048
P
0
Recognized in
current year
P 238,032
238,032
P
0
To date
Recognized in
prior years
Recognized in
current year
20x3
Revenue*
Costs/Expenses
Gross Profit
* equivalent to costs incurred
To date
P 126,048
126,048
P
0
20x4
Revenue*
Costs/Expenses
Gross Profit
* equivalent to costs incurred
20x5
Revenue (P540,000 x 100%)
Costs/Expenses (P492,000 x 100%)
Gross Profit (P48,000 x 100%)
Recognized in
prior years
P 540,000
P 364,080
P 175,200
_492,000
364,080
127,920
P 48,000
P 48,000
P
0
Alternatively, the gross profit recognized each year may also be computed as follows:
20x3
Contract price:
Initial amount of contract………….......
Variation……………………………………
Total contract price…………………………
Costs incurred each year………………….
Add: Costs incurred in prior years………..
Actual costs incurred to date ……...…….
Add: Estimated costs to complete………
Total estimated costs …….…..…………….
P528,000
_______P528,000
P 126,048
_______P 126,048
____ _?
P
?
20x4
P528,000
__12,000
P540,000
P244,032
_126,048
P370,080
____ _?
P
?
20x5
P528,000
12,000
P540,000
P 121,920
_370,080
P492,000
_______P492,000
Estimated gross profit……………………….
Percentage of completion………………..
Gross profit to date………………………….
Less: Gross profit in prior years…………….
Gross profit in current year………………...
P
0
_ -___
P
0
_______P
0
P
0
_ -___
P
0
_______P
0
P 48,000
___100%
P 48,000
__
0
P 48,000
Following are the entries for the years 20x3 to 20x5:
20x3
1. To record costs incurred:
Construction In Progress*………......
Materials Inventory…………………..
Cash, payables, etc……………..
20x4
126,048
238,032
6,000
126,048
2. To record progress billings:
Accounts receivable………………..
Progress billings*.………………….
144,000
3. To record collections:
Cash………………………………….....
Accounts receivable……………
120,000
4. To recognize Revenue, Costs
and Gross Profit:
Construction Expenses………………
Construction in Progress*..………....
Revenue from Construction......
126,480
20x5
127,920
6,000
121,920
244,032
240,000
144,000
156,000
240,000
228,000
120,000
156,000
192,000
228,000
238,032
126,480
192,000
127,920
48,000
238,032
5. To close Construction In Progress**
and Progress Billings account:
Progress billings………………………
Construction In Progress……….
* The term “Contract account” may alternatively be used.
** If “Contract account” is used then no entry is required for No. 5.
175,920
540,000
540,000
2. Compute the Current asset – Contract Asset/Current liability – Contract Liability:
a. Over Time/Percentage-of-completion method using cost-to-cost method
ANSWER - a. Input Measure - Percentage of Completion Method
Current Asset:
Accounts receivable……………………….
Other receivables:
Construction In Progress…………………
Less: Progress billings…………………….
Contract asset
Raw materials Inventory……………………
20x3
P 24,000
20x4
P 36,000
20x5
P
-
P399,600
_384,000
P 15,600
P 6,000
Current Liability:
Payables (“Payments on Account”)
Progress billings………………………………
Less: Construction In Progress…………….
Contract Liability
Construction In Progress
P144,000
_137,280
P 6,720
Progress Billings
20x3 CI 126,048
Pr 11,232
144,000 20x3
end of x3 137,280
20x4 CI 238,032
Pr 24,288
144,000 end of x3
240,000 20x4
end of x4 399,600
20x5 CI 127,920
Pr 12,480
384,000 end of x4
156,000 20x5
540,000
540,000
540,000
540,000
where: CI - cost incurred each year
Pr - profit
b. Point-in-Time/Cost recovery method (also known as zero-profit approach)
ANSWER - b. Input Measure – Cost Recovery Method
Current Asset:
Accounts receivable……………………….
Raw materials Inventory……………………
20x3
P 24,000
20x4
P 36,000
P 6,000
P 137,280
_144,000
P 6,720
P384,000
_364,080
P 19,920
20x5
P
-
Current Liability:
Payables (“Payments on Account”)
Progress billings………………………………
Less: Construction In Progress…………….
Contract liability
Construction In Progress
Progress Billings
20x3 CI 126,048
Pr
0
144,000 20x3
end of x3 126,048
20x4 CI 238,032
Pr
0
144,000 end of x3
240,000 20x4
end of x4 364,080
20x5 CI 127,920
Pr 48,000
384,000 end of x4
156,000 20x5
540,000
540,000
540,000
540,000
where: CI - cost incurred each year
Pr - profit
3. Compute the gross profit.
a. Over Time/Percentage-of-completion method using cost-to-cost method
ANSWER - a. Input Measure - Percentage of Completion Method (refer to requirement 1 for detailed computation)
Revenue………………………………………
Less: Costs / Expenses……………………...
Gross Profit…………………………………….
20x3
P 137,280
_126,048
P 11,232
20x4
P 262,320
_238,032
P 24,288
20x5
P 140,400
_127,920
P 12,480
b. Point-in-Time/Cost recovery method (also known as zero-profit approach)
ANSWER - b. Input Measure – Cost Recovery Method (refer to requirement 1 for detailed computation)
Revenue………………………………………
Less: Costs / Expenses……………………...
Gross Profit…………………………………….
20x3
P 126,048
_126,048
P
0
20x4
P 238,032
_238,032
P
0
20x5
P 175,920
_127,920
P 48,000
Multiple Choices:
1.
2.
3.
4.
5.
Over Time - A
1–B
1–B
(850,000 + 50,000) x 65% + (900,000 – 10,000) x 25% + (890,000 – 10,000) x 5% + (880,000 –
10,000) x 5% = 895,000 – A