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QUIZ 3 Construction Contracts
BS Accountancy (University of Nueva Caceres)
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Chapter 7
Construction Contracts
NAME:
Professor:
Section:
Date:
Score:
LONG QUIZ:
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.
3. Which of the following does not indicate that a promise to transfer a good or service is separately
identifiable?
a. The good or service is not an input to a combined output specified by the customer.
b. The good or service does not significantly modify another good or service promised in the
contract.
c. The good or service is not highly interrelated with other goods or services promised in the
contract.
d. The customer’s decision of not purchasing a good or service affects the other promised goods
or services in the contract.
Use the following information for the next three questions:
Information on Red Hot Co.’s construction contracts with customers which commenced during 20x1 is
shown below:
Contract 1 Contract 2
Contract price
420,000
300,000
Costs incurred during the year
240,000
280,000
Estimated costs to complete
120,000
40,000
Progress billings
150,000
270,000
Collections
90,000
250,000
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4. At contract inception, Red Hot Co. assessed that its performance obligation in each of Contract 1
and Contract 2 is satisfied over time. Red Hot Co. uses the ‘cost-to-cost’ method in measuring its
progress on the contract. How much total profit (loss) is recognized from the two contracts in
20x1?
a. 40,000
b. 20,000
c. (20,000)
d. 0
C1 = ((240/240 + 120)*420) – 240 = 40,000 or (240/240+120)*(420-240-120) = 40,000
C2 = 300 – (280 + 40) = -20,000
5. At contract inception, Red Hot Co. assessed that its performance obligation in each of Contract 1
and Contract 2 is satisfied over time. However, Red Hot Co. determined that the outcome of the
performance obligation in each of the contracts cannot be reasonably measured but contract costs
incurred are recoverable. How much total profit (loss) is recognized from the two contracts in
20x1?
a. 40,000
b. 20,000
c. (20,000)
d. 0
C1 = 240 – 240 = 0
C2 = 300 – 280 – 40 = -20,000
6. At contract inception, Red Hot Co. assessed that its performance obligation in each of Contract 1
and Contract 2 is satisfied at a point in time, that is, when the construction is completed. How
much total profit (loss) is recognized from the two contracts in 20x1?
a. 40,000
b. 20,000
c. (20,000)
d. 0
Revenue, cost, and consequently the gross profit is recognized at a point in time in which the
performance obligation is wholly satisfied. However, the losses on onerous contract will be recognized
regardless of method used.
7. VALEDICTION Construction Co. entered into an ₱80M 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 ₱40M. VALEDICTION incurred the following costs in
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 equipment not used in the
contract
Costs of moving equipment and materials to and from
the construction site
400,000
12,000,000
2,000,000
4,000,000
800,000
480,000
240,000
160,000
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Costs of hiring equipment
560,000
Advance payment to subcontractor (the subcontracted
work is not yet started)
80,000
18/40 x 80 = 36,000,000
How much revenue is recognized in the first year of the contract?
a. 25M
b. 36M
c. 45M
d. 46M
Use the following information for the next two questions:
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
8. What amount of revenue is recognized on the contract in 20x1?
a. 240,000
b. 220,000
c. 200,000
d. 180,000
(120/120+240) x 600 = 200,000
9. What amounts are presented in Contractor Co’s. statement of financial position under <List A:
Traditional accounting> and <List B: PFRS 15>?
Gross amount due from (to) cust.
Contract asset(liability)
a. 20,000
20,000
b. (20,000)
(20,000)
c. 20,000
(20,000)
d. (40,000)
(40,000)
Contract liability = 180 billed – 200 revenue = 20,000 contract assets
200 CIP – 180 Progress billing = 20,000 gross due from cust
10. 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%
20x2
6,960,000
65%
How much is the profit recognized in 20x2?
a. 1,131,000
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b. 978,750
c. 840,750
d. 804,750
8,700 – 6,525 = 2,175 x 15% = 326,250
8,700 – 6,960 = 1,740 x 65% = 1,131,000
1,131 – 326.25 = 804,750
Or
15% x 6,525 = 978.75
15% x 8,700 = 1,305
65% x 6,960 = 4,524
65% x 8,700 = 5,655
(5,655 – 4,524) – (1,305 – 978.75) = 804,750
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.
11. What amount of revenue is recognized in 20x2?
a. 2,800,000
b. 3,000,000
c. 4,800,000
d. 6,000,000
(4,800 – 2,250) + (1,200 – 750) = 3,000
12. How much is the transaction price in the contract?
a. 5,000,000
b. 6,000,000
c. 7,000,000
d. 9,000,000
4,800 + 1,200 = 6,000
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
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20x3
6,125,000
125,000
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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.
13. How much revenue is recognized on the contract in 20x3?
a. 2,610,000
b. 2,595,000
c. 2,056,000
d. 2,022,000
((6,125 + 125) x 1.20 + 200) x (6,125/6125+125)) – ((4,575 + 1,525) x 1.20) x (4,575/4,575+1,525)) = 2,056,000
Or
((6,125 + 125) x 1.20 + 200) x (6,125/6125+125)) – 4,575 x 1.20 = 2,056,000
14. How much profit is recognized on the contract in 20x3?
a. 506,000
b. 595,000
c. 603,000
d. 634,000
2,056 – (6,125 + 4,575) = 506,000
Use the following information for the next two questions:
In 20x1, Salamagi Co. entered into a contract with a customer. The contract stipulates the following:
 Contract price of ₱20,000,000
 5% mobilization fee due upon signing of the contract, to be deducted from the final billing
 10% customer retention on all subsequent progress billings, to be paid to Salamagi on completion
of the project
Salamagi Co. estimated a ₱5,000,000 gross profit from the project. The percentage of completion
method will be used. In 20x1, Salamagi billed the customer for 50% completion of the project. The
customer accepted all the billings, except one for 10% which was accepted on January of the following
year. All the accepted billings were collected during the year except an 8% billing which was due
January of the following year.
15. What is the amount of profit recognized from the contract in 20x1?
a. 2,500,000
b. 2,650,000
c. 2,720,000
d. 2,900,000
5/20 = 25% x 50% x 20 = 2,500
16. What is the total amount of collections from the billings in 20x1?
a. 5,760,000
b. 6,400,000
c. 6,760,000
d. 7,400,000
5% x 20 + (20x50%-20x10%-20x8%) x 90% = 6,760
Use the following information for the next two questions:
In November 20X2, an entity contracts with a customer to refurbish a 3-storey building and install new
elevators for a total consideration of ₱5,000,000. The promised refurbishment service, including the
installation of elevators, is a single performance obligation satisfied over time. Total expected costs are
₱4,000,000, including ₱1,500,000 for the elevators. The entity determines that it acts as a principal
because it obtains control of the elevators before they are transferred to the customer.
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A summary of the transaction price and expected costs is as follows:
Transaction price
Expected costs:
Elevators
Other costs
Total expected costs
₱5,000,000
₱1,500,000
2,500,000
₱4,000,000
The entity uses an input method based on costs incurred to measure its progress towards complete
satisfaction of the performance obligation. The customer obtains control of the elevators when they are
delivered to the site in December 20X2, although the elevators will not be installed until June 20X3. The
costs to procure the elevators are significant relative to the total expected costs to completely satisfy the
performance obligation. The entity is not involved in designing or manufacturing the elevators.
As of December 31, 20X2, the entity has incurred total costs of ₱500,000, excluding the cost of the
elevators.
17. How much revenue is recognized in 20X2?
a. 1,000,000
b. 2,200,000
c. 2,500,000
d. 0
500/2500 x (5,000 – 1,500) = 700 + 1,500 = 2,200,000
18. How much profit is recognized from the contract in 20X2?
a. 265,000
b. 220,000
c. 200,000
d. 0
2,200 – 1,500 – 500 = 200,000
19. An entity, a construction company, enters into a contract to construct a commercial building for a
customer on customer-owned land for a promised consideration of ₱1 million and a bonus of
₱200,000 if the building is completed within 24 months. The entity accounts for the promised
bundle of goods and services as a single performance obligation satisfied over time because the
customer controls the building during construction. At the inception of the contract, the entity
expects the following:
Transaction price
₱1,000,000
Expected costs
700,000
Expected profit (30%)
300,000
At contract inception, the entity does not expect to receive the bonus because it cannot conclude that it
is highly probable that a significant reversal in the amount of cumulative revenue recognized will not
occur. Completion of the building is highly susceptible to factors outside the entity’s influence,
including weather and regulatory approvals. In addition, the entity has limited experience with similar
types of contracts.
The entity determines that the input measure, on the basis of costs incurred, provides an appropriate
measure of progress towards complete satisfaction of the performance obligation.
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Information as of the end of the first year is as follows:
Costs incurred to date
₱420,000
Total expected costs
₱700,000
The entity reassesses the variable consideration and concludes that the amount is still constrained.
In the first quarter of the second year, the parties to the contract agree to modify the contract by
changing the floor plan of the building. As a result, the fixed consideration and expected costs increase
by ₱150,000 and ₱120,000, respectively. In addition, the allowable time for achieving the ₱200,000
bonus is extended by 6 months to 30 months from the original contract inception date. At the date of
the modification, on the basis of its experience and the remaining work to be performed, which is
primarily inside the building and not subject to weather conditions, the entity concludes that it is
highly probable that including the bonus in the transaction price will not result in a significant reversal
in the amount of cumulative revenue recognized. In assessing the contract modification, the entity
concludes that the remaining goods and services to be provided using the modified contract are not
distinct from the goods and services transferred on or before the date of contract modification; that is,
the contract remains a single performance obligation.
How much is the cumulative catch-up adjustment to revenue recognized on the date of contract
modification? (round-off percentage of completion to one decimal place only)
a. 89,200
b. 91,200
c. 92,800
d. 93,400
Year 1 = 420/700 x 1,000 = 600
Year 2 = 420/(700 + 120) x (1,000 + 150 + 200) = 691,200
691,200 – 600,000 = 91,200
20. ABC Co. started work on a construction contract in 20x1. The contract price is ₱10M. However, the
contractual agreement stipulates that if the cumulative inflation reaches or exceeds 26%, the
contact price shall be adjusted upwards by 10%. Additional information on the contract is shown
below:
Costs incurred to date
Estimated costs to complete
Cumulative inflation rate
20x1
2,400,000
3,600,000
18%
20x2
4,500,000
1,500,000
27%
How much is the profit recognized in 20x2?
a. 1,890,000
b. 1,980,000
c. 2,060,000
d. 2,150,000
Year 1 = 2,400/(2,400+3,600) x 10,000 = 4,000 – 2,400 = 1,600
Year 2 = 4,500/(4,500 + 1,500) x 10,000(1.1) = 8,250 – 4,500 – 1,600 = 2,150,000
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