Drill
(Construction Contract)
1. The primary issue in the accounting for construction contracts is
a. the determination of the percentage of completion and 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. According to PFRS 15, each contract is accounted for separately. However, two or more contracts
entered into at or near the same time with the same customer are combined and accounted for as
a single contract if any of the following conditions are met, except
a. The contracts are negotiated as a package with a single commercial objective.
b. The amount of consideration to be paid in one contract depends on the price or performance
of the other contract.
c. Some or all of the goods or services promised in the contracts are a single performance
obligation.
d. At contract inception, the collectability of the consideration is probable of collection.
On July 1, 20x1, Contractor Co. enters into a contract with a customer for the construction of a building.
At contract inception, Contractor Co. assesses the contract in accordance with the principles of PFRS
15 and concludes that it has a single performance obligation that is satisfied over time. Contractor Co.
then determines that the appropriate measure of its progress on the contract is input method based
on costs incurred. Information on the contract is shown below:
Contract price
Contract costs incurred during 20x1
Estimated remaining costs as of Dec. 31, 20x1
Billings to the customer during 20x1
Collections on billings during 20x1
600,000
120,000
240,000
180,000
60,000
3. What amount of revenue is recognized on the contract in 20x1?
4. In 20x1, Silverchair Co., a construction company, enters into a contract with a customer for the
construction of a building. The contract states a fixed fee of ₱8,700,000. Silverchair’s performance
obligation in the contract is satisfied over time. Silverchair uses the ‘cost-to-cost’ method in
measuring its progress in the contract. Information on the contract follows:
Estimated total costs at completion
Percentage of completion
20x1
6,525,000
15%
How much is the profit recognized in 20x2?
20x2
6,960,000
65%
Use the following information for the next two questions:
In 20x1, Gorgeous Too Co. enters into a fixed-price construction contract with a customer. At contract
inception, Gorgeous Too Co. assesses its performance obligations in the contract and concludes that it
has a single performance obligation that is satisfied over time. Gorgeous Too Co. determines that the
measure of progress that best depicts its performance on the contract is input method based on costs
incurred.
Information on the contract follows:
Cumulative contract costs incurred
Cumulative profits recognized
Progress billings
Collections on progress billings
20x1
2,250,000
750,000
2,400,000
2,000,000
20x2
4,800,000
1,200,000
3,600,000
4,000,000
The contract is completed in 20x2.
5. What amount of revenue is recognized in 20x2?
6. How much is the transaction price in the contract?
Use the following information for the next two questions:
In 20x1, ABC Co. was contracted to build a railroad. The contract price is equal to the construction
costs incurred plus 20% thereof. However, if the project is completed within 4 years, ABC will receive
an additional payment of ₱200,000. Information on the project is shown below:
Costs incurred to date
Estimated costs to complete
20x1
2,400,000
3,600,000
20x2
4,575,000
1,525,000
20x3
6,125,000
125,000
In 20x1 and 20x2, it was not highly probable that the project will be completed on time. However, in
20x3, ABC assessed that project will be completed earlier than originally expected and thus it is now
highly probable that the incentive payment will be received.
7. How much revenue is recognized on the contract in 20x3?
8. How much profit is recognized on the contract in 20x3?