CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
ADVANCED FINANCIAL ACCOUNTING
GERMAN/LIM/VALIX/K. DELA CRUZ/MARASIGAN
LONG-TERM CONSTRUCTION
Part I: Theory of Accounts
1. It is a contract specifically negotiated for the construction of an asset or a combination of assets
that are closely interrelated or interdependent in terms of their design, technology and function or
their ultimate purpose or use.
a.
b.
c.
d.
Construction contract
Installment contract
Franchise contract
Consignment contract
2. It is a construction contract in which the contractor agrees to a fixed contract price, or a fixed rate
per unit of output, which in some cases is subject to cost escalation clauses.
a.
b.
c.
d.
Fixed price contract
Cost plus contract
Variable contract
Mixed contract
3. It is a construction contract in which the contractor is reimbursed for allowable or otherwise
defined costs, plus a percentage of these costs or a fixed fee.
a.
b.
c.
d.
Fixed price contract
Cost plus contract
Variable contract
Mixed contract
4. Aside from the initial amount of revenue agreed in the long-term construction contract, additional
revenues may be recognized by the contractor (1) to the extent that it is probable that they will
result in revenue and (2) they are capable of being reliably measured. Which of the following will
not be considered as additional contract revenue by a contractor?
a. Variation in contract work as instructed by the customer regarding the scope of work to be
performed.
b. Claim that the contractor may seek to collect from the customer for customer caused delays or
errors in specification or design.
c. Incentive payments to be paid to the contractor if specified performance standards are met or
exceeded or for early completion of the contract.
d. Gain on sale of scrap materials from construction.
5. Which of the following costs shall be excluded in the contract costs of construction contract?
a. Costs that relate directly to the specific contract.
b. Costs that are directly attributable to contract activity in general and can be allocated to the
contract.
c. Such other costs as are specifically chargeable to the customer under the terms of the contract.
d. Selling costs such as advertisement expense or commissions of real estate agents or brokers.
6. The following costs shall be capitalized as part of construction in progress or contract costs, except
a. Costs of hiring and moving of plant and equipment to and from the contract site.
b. Systematically, rationally and consistently allocated construction overheads and borrowing
costs.
c. Costs that are specifically chargeable to the customer under the terms of the contract may
include some general administration costs and development costs for which reimbursement is
specified in the terms of the contract.
d. General and research and development costs for which reimbursement is not specified in the
contract.
8906
Page 2
7. When the outcome of a construction contract can be estimated reliably, how shall contract revenue
and contacts costs associated with the construction contract be recognized?
a. They shall be recognized as revenue and expense respectively by reference to the state of
completion of the contract activity at the end of the reporting period also known as by
percentage of completion method.
b. They shall be recognized as revenue and expenses respectively by reference to the percentage
of collection of receivables from customers also known as by instalment method.
c. They shall be recognized as revenue and expenses respectively by the date of earning of
revenue or incurring of expenses also known as accrual method.
d. Revenue shall be recognized only to the extent of contract cost incurred that it is probable will
be recoverable and the contract cost shall be recognized as an expense in the period in which
there are incurred also known as cost recovery or zero-profit method.
8. When the outcome of a construction contract cannot be estimated reliably, how shall contract
revenue and contacts costs associated with the construction contract be recognized?
a. They shall be recognized as revenue and expenses respectively by reference to the state of
completion of the contract activity at the end of the reporting period also known as by
percentage of completion method.
b. They shall be recognized as revenue and expenses respectively by reference to the percentage
of collection of receivables from customers also known as by instalment method.
c. They shall be recognized as revenue and expenses respectively by the date of earning of
revenue or incurring of expenses also known as accrual method.
d. Revenue shall be recognized only to the extent of contract cost incurred that it is probable will
be recoverable and the contract cost shall be recognized as an expense in the period in which
there are incurred also known as cost recovery or zero-profit method.
9. When it is probable that total contract costs will exceed total contract revenue, how shall it be
accounted for?
a. The expected loss shall be recognized as an expense immediately regardless of the certainty or
uncertainty of the outcome of a construction contract.
b. The expected loss shall be recognized as an expense immediately only when the outcome of a
construction contract cannot be estimated reliably.
c. The expected loss shall be recognized as an expense by reference to the state of completion of
the contract activity at the end of the reporting period when the outcome of a construction
contract cannot be estimated reliably.
d. The expected loss shall be accounted for based on company’s policy.
10. When the company decides to change its accounting for construction contract from percentage of
completion to cost recovery method, how shall the accounting change be treated?
a. It shall be accounted for as a change in accounting policy treated by retrospective application or
with cumulative effect in the beginning retaining earnings at the date of change.
b. It shall be accounted for as a change in account estimate treated by prospective application to
the date of change and future date profit or loss.
c. It shall be accounted for as a prior period error treated by retrospective restatement or with
cumulative effect in the beginning retaining earnings at the date of discovery of error.
d. It shall be accounted for as an equity transaction to be adjusted in the share premium or other
comprehensive income as the case may be.
11. When the company changes its percentage of completion of the construction project every year,
how shall the accounting change be treated?
a. It shall be accounted for as a change in accounting policy treated by retrospective application or
with cumulative effect in the beginning retaining earnings at the date of change.
b. It shall be accounted for as a change in accounting estimate treated by prospective application
to the date of change and future date profit or loss.
c. It shall be accounted for as a prior period error treated by retrospective restatement or with
cumulative effect in the beginning retaining earnings at the date of discovery of error.
d. It shall be accounted for as an equity transaction to be adjusted in the share premium or other
comprehensive income as the case may be.
8906
Page 3
12. How shall the contructor present in its statement of financial the accounts related to construction
contract?
a. It shall present as an asset the gross amount due from customers for contract work which is the
net amount of cost incurred plus recognized profits less the sum of recognized losses and
progress billings for all contracts in progress for which costs incurred plus recognized profits or
less recognized losses exceeds progress billings. (Meaning: It is presented as an asset if
Construction-in-Progress exceeds Progress Billings)
b. It shall present as a liability the gross amount due to customers for contract work is the net
amount of cost of cost incurred plus recognized profits less the sum of recognized losses and
progress billings for all contracts in progress for which progress billings exceeds costs incurred
plus recognized profits or less recognized losses. (Meaning: It is presented as a liability if
Progress Billings exceeds Construction in Progress)
c. Either A or B but the liabilities and assets resulting from the difference of Construction in
Progress and Progress Billings shall not be netted or offsetted in the Statement of Financial
Position.
d. Both A and B but the liabilities and assets resulting from the difference of Construction in
Progress and Progress Billings shall be netted or offsetted in the Statement of Financial
Position
13. Which of the following accounting changes shall be treated retrospectively instead prospectively
by the long-term construction contractor?
a.
b.
c.
d.
Change in the construction revenue
Change in the estimated costs to complete the contract
Change in the estimate of the outcome of the contract
Change from percentage of completion to cost recovery method or vice versa
Part II: Problem Solving.
1. On January 1, 2021, Entity A entered into a contract for the construction of a building at an original
price of P2,000,000 to be completed on June 30, 2023 subject to penalty of P500,000 on the year it
becomes virtually certain that construction will not be completed on the date agreed upon. On
January 1, 2022, the contract price increased by P2,500,000 due to the change in the design of the
building requested by the customer. The outcome of the construction can be estimated reliably.
Cumulative costs incurred as of the end of the year
Estimated remaining cost to complete at the end of
the year
12/31/2021
12/31/2022
12/31/2023
600,000
3,075,000
3,780,000
900,000
1,025,000
420,000
1. What is the realized gross profit (loss) to be recognized by Entity A for the year ended
December 31, 2023?
a. 200,000
b. (30,000)
c. (500,000)
d. 270,000
2. What is the construction-in-progress balance as of December 31, 2022?
a.
b.
c.
d.
3,075,000
3,375,000
3,675,000
3,975,000
8906
Page 4
2. On January 1, 2020, an entity entered into a long-term construction contract with fixed contract
price of P5,000,000. The entity billed its client as follows: 30% during 2020, 40% during 2021 and
the remainder at the year of project completion. The following data were provided by the cost
accountant of the entity:
2020
2021
2022
Cumulative Cost incurred as of the end of the year
Estimated remaining cost to complete at the end of the
year
P2,200,000
P3,600,000
P4,800,000
P3,300,000
P900,000
-
1. What is the excess of construction in progress over progress billings on December 31,
2020 under percentage of completion method, cost-to-cost approach?
a.
b.
c.
d.
500,000
200,000
300,000
400,000
2. What is the excess of construction in progress over progress billings on December 31,
2021 under cost recovery method?
a.
b.
c.
d.
100,000
500,000
300,000
400,000
3. Assume that an architect hired by the company made the following estimates of the
project’s percentage of completion at 50%, 90% and 100% at the end of 2020,2021, and
2022, respectively, what is the realized gross profit for 2021, using percentage of
completion method – output measures as determined by estimates made by the architect?
a. 900,000
b. 600,000
c. (300,000)
d. 450,000
3. On January 1, 2021, Entity A accepted a long-term construction project to build a condominium at
a fixed contract price of P100,000,000. The outcome of the construction project cannot be
estimated reliably. The following data are provided by the accountant and project manager
concerning the construction costs for the three years of construction:
Year
Costs incurred during the year
Estimated cost to complete at the end of the year
12/31/2021
12/31/2022
12/31/2023
P40,000,000
P90,000,000
P10,000,000
P60,000,000
P20,000,000
P10,000,000
What is the balance of construction in progress on December 31, 2023?
a.
b.
c.
d.
60,000,000
40,000,000
50,000,000
70,000,000
8906
Page 5
4. DM, Inc. works on a P10,500,000 contract in 2022 to construct an office building. During 2022,
DM, Inc. uses the cost to cost method. At December 31, 2022, the balances in certain accounts
were:
Construction in progress – P3,780,000
Accounts receivable – P360,000
Billings on construction in process P1,800,000
Contract retention – P180,000
Mobilization fee – P140,000.
At December 31, 2022, the estimated cost at completion is P7,350,000.
How much is the realized gross profit in 2022?
a.
b.
c.
d.
1,102,500
1,062,500
1,242,500
1,134,000
5. Filvida Inc. entered into a long-term construction contract in January 1, 2020 to construct a
shopping mall at a fixed contract price of P10M. Filvida determined that the outcome of the
construction cannot be estimated reliably. Filvida normally bills its customer 50% at the middle of
first year, 20% at the middle of second year and the balance at the date of completion of project. A
mobilization fee of 10% of the contract price (deductible from the 2021 bill) is payable 30 days
after the contract signing. The contract provides that the customer shall pay 80% of the total
amount billed, on or before the December 31 subject to retention provision/withholding by
customer of 5% of amount to be paid by the customer which is intended to protect the customer
from the contractor failing to adequately complete its obligation under the contract. The customer
satisfactorily complied with the contractual provision. Filvida’s accountant provide the following
data for the years ended December 31, 2020 and December 31, 2021:
December 31, 2020
December 31, 2021
P4,000,000
P9,000,000
P7,000,000
P4,000,000
Costs incurred to date
Estimated costs to complete as of this date
What is the 12/31/2021 (1) Due from Customer, 12/31/2021 (2) the excess of construction in
progress over progress billings in 2021 and (3) the realized gross profit/(loss) in 2021,
respectively to be presented by Filvida Inc.?
a.
b.
c.
d.
680,000 and (1,000,000) and 2,000,000
400,000 and (3,000,000) and 0
1,400,000 and 4,000,000 and (3,000,000)
320,000 and (2,000,000) and (1,000,000)
6. On January 1, 2021, Entity A accepted a long-term construction project to construct a building with
an initial contract price of P10,000,000. The outcome of the construction project can be estimated
reliably and the contractor decided to employ cost to cost method. During 2023, the contract price
increases due to the change in the project design requested by the client. The following data are
provided by the accountant and project manager concerning the construction costs for the three
years of construction:
Year
12/31/2021
12/31/2022
12/31/2023
Cumulative costs incurred as of the end of the year
Realized gross profit/(loss) during the year
Percentage of completion as of the end of the year
P1,000,000
?
12.5%
?
P350,000
60%
P10,800,000
(P1,600,000)
90%
What is the Construction cost of sales to be recognized in the Income Statement for the year
ended December 31, 2023?
a.
b.
c.
d.
5,400,000
4,600,000
4,800,000
5,500,000
8906
Page 6
7. On January 1, 2021, Entity A started the construction of a building with a fixed contract price of
P10,000,000. The outcome of the construction project can be estimated reliably and the contractor
decided to employ cost to cost method. The following data are provided by the accountant and
project manager concerning the construction costs for the three years of construction:
Year
Costs incurred during the year
Realized gross profit/(loss) during the year
Percentage of completion as of the end of the year
12/31/2021
12/31/2022
12/31/2023
?
P750,000
37.5%
?
(P250,000)
50%
P3,740,000
(P800,000)
?
What is the balance of Construction in Progress on December 31, 2023?
a.
b.
c.
d.
8,000,000
7,480,000
7,940,000
8,280,000
8. On January 1, 2021, Matibay Development Corporation (MDC) entered into a contract with
Company B to construct a new corporate headquarters on land owned by Company B. Contractor
MDC determines that control of the building is passed to Company B as it is constructed.
Therefore, the performance obligation is satisfied over time. The contract price is P5,000,000, but
that amount will be reduced or increased depending on when construction of the building is
completed. For each day before December 31, 2023, that the building is completed, the promised
consideration will increase by P25,000. For each day after December 31, 2023 that the building is
incomplete, the promised consideration will be reduced by P25,000. The parties have also agreed
that, when the building is complete, it will be inspected and assigned a green building certification
level. If the building achieves the certification level specified in the contract, Contractor MDC will
be entitled to an incentive bonus of P200,000.
On December 31, 2021, MDC determined that the “expected value” better predicts the variable
consideration it will receive regarding the early completion or delay of the construction because of
the different outcomes possible based on MDC’s current construction schedule and its experience
with past projects. MDC estimates that it is 50% likely to complete the project 10 days ahead of
schedule and receive an incentive of P250,000, 25% likely to complete the project on time and
receive no incentive and 25% likely to complete the project five days past schedule and incur a
P125,000 penalty
As of the same date, on the other hand, MDC determined that the “most likely amount” is the better
predictor to estimate the variable consideration associated with the green building certification
bonus because there are only two possible outcomes (P200,000 or P0). Based on its history of
completing building projects that achieve the green building certification level specified in the
contract and the absence of factors that may indicate the criteria will not be met, MDC decided to
include the bonus in the transaction price.
On December 31, 2022, MDC did not change its estimate with respect to green building
certification bonus but after evaluation evaluating construction completed to date and the
remaining project schedule, Contractor MDC determines it is now 75% likely to complete the
project 10 days ahead of schedule and receive an incentive of P250,000 and 25% likely to complete
the project on time and receive no incentive bonus.
The following construction costs were provided by MDC for the years ended December 31, 2021
and 2022:
Costs incurred during the year
Estimated costs to complete at the end of the year
December 31, 2021
December 31, 2022
P2,400,000
P1,600,000
P750,000
P1,350,000
Under IFRS 15, Assuming the outcome of construction can be estimated reliably, what is the
realized gross profit/(gross loss) to be recognized by MDC for the year ended December 31,
2022?
a.
b.
c.
d.
(230,000)
(220,625)
(250,000)
(155,000)
8906
Page 7
9. DMCI entered into a fixed price contract of P120 million for the construction of a road for Camella
Corp. DMCI determines the stage of completion of construction contracts using the percentage of
completion “cost to cost method”. The estimated cost at completion is P75 million.
The following were the total actual costs incurred by DMCI during the first year of the
construction:
a.
b.
c.
d.
e.
f.
g.
h.
i.
k.
l.
Research and development costs for which reimbursement is not specified in the
contract
Cost of negotiating the contract (charge immediately as expense)
Marketing costs
Costs of hiring equipment
Costs of materials purchased but not yet used in construction
Costs of materials used in construction
Costs of moving plant, equipment and materials to and from the contract site
Administrative costs not expected to be reimbursed
Depreciation of equipment used in construction
Site labor costs
Site supervision costs
1,000,000
500,000
150,000
700,000
2,500,000
15,000,000
200,000
100,000
600,000
5,000,000
1,000,000
What is the net income at the end of the year?
a. 13,250,000
b. 10,790,000
c. 11,750,000
d. 9,250,000
END
8906