LONG-TERM CONSTRUCTION
CONTRACTS
CONSTRUCTION CONTRACTS
 PAS 11, contracts specifically
negotiated for the construction of an
asset or a combination of assets
closely interrelated or
interdependent in terms of design,
technology, and its ultimate purpose
or use.
 Construction project that
extends through more than
one accounting period.
 Both parties agree contract
price on advance
FIXED PRICE CONTRACT
Contractor agrees to a fixed contract price or fixed
rate per unit of output, to which some is subject to
cost escalation clauses.
COST PLUS CONTRACT
Contractor is reimbursed for allowable or defined
costs, plus a percentage of the cost or a fixed fee.
COST REVENUE
-
Revenue is measured at fair value of the consideration received or receivable.
Includes amount initially agreed in the contract.
May include incentive payments
Construction Cost
- Cost directly related to
the specific contract.
Types
1. Cost incurred to date
2. Estimated Cost to
complete
1. COST INCURRED TO DATE
- Precontanct costs and cost incurred after contact
acceptance
- Precontract cost become cost incurred to date only when
contract is accepted.
- Cost incurred after acceptance are cost incurred toward
completion of project, credited in the Construction in
Progress account.
2. ESTIMATED COST TO COMPLETE
- Anticipated costs of material, labor, subcontracting cost,
and indirect cost required to complete project.
SUBCONTRACTING COST
-
Cost incurred when principal contractor hires other contractors to perform
part of the project.
Included in the construction in progress account.
COST OF MATERIALS PURCHASED IN ADVANCE OF THEIR USE
-
Not treated as cost incurred UNTIL materials have been used in production.
COMBINING AND SEGMENTING CONTRACTS
-
-
Contracts are combined if they are closely related, asset are singly
negotiated, part of a single project with overall profit margin, and
performed continuously.
Contracts are segmented if there are separate proposals for separate
components of a project, assets are subject to separate negotiation, and cost
and revenue of each asset can be separately identified.
Percentage to Completion Method
o
o
o
Used when estimates are reliable
Gross profit is recognized as construction expenses
Revenue = Construction Cost + CIP
1. Input measures (Cost to Cost) – Used for one large project
2. Output measures (Units of Delivery) – Used for several units project
- Revenue is recognized when a unit is completed, delivered, and accepted by the buyer,
although the entire project is not yet finished.
DEGREE OF COMPLETION =
COST INCURRED____
TOTAL ESTIMATED COST
REALIZED GROSS = DEGREE OF COMPLETION X GROSS
PROFIT
PROFIT
JOURNAL ENTRIES:
To record cost incurred
Construction in Progress
PERCENTAGE COMPLETION METHOD: GROSS
PROFIT
YEAR X
Total Contract Price
P xxx
Cost Incurred to Date
xxx
Estimated Cost to Complete
xxx
Total Estimated Cost
xxx
xxx
Materials Inventory
xxx
Cash
xxx
To record progress billings
Accounts Receivable
xxx
Contract billings
xxx
To record billing collection
Cash
xxx
Accounts Receivables
xxx
To record revenue recognition
Gross Profit
xxx
Cost of Construction
X Percentage of Completion
x%
Construction in Progress
Gross Profit Earned TO DATE
xxx
(profit)
Less: Gross Profit PRIOR YEAR
xxx
Gross Profit Earned This Year
xxx
xxx
xxx
Construction revenue
xxx
To close CIP account (end of the project)
Contract Billings
Construction in Process
xxx
xxx
TO COMPUTE FOR DUE TO CUSTOMERS
Current Liability:
Progress billings
xxx
Less: Construction in Progress
(xxx)
Due to customers
xxx
TO COMPUTE FOR DUE FROM CUSTOMERS
Current Asset:
Construction in Progress
xxx
Less: Progress billings
(xxx)
Due from customers
xxx
ZERO PROFIT METHOD
 Used when estimates are
not reliable
 Revenue = Construction
Cost