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AFAR 04 Construction Accounting
BS Accountancy (University of Baguio)
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ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY
CPA Review Batch 42  October 2021 CPA Licensure Exam  Week No. 5
A. Dayag  G. Caiga  M. Ngina
ADVANCED FINANCIAL ACCOUNTING & REPORTING
AFAR-04: CONSTRUCTION ACCOUNTING (PFRS 15)
What is a Construction Contract?
A construction contract 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
or function or their ultimate purpose or use.
Two Types of Construction Contract or Contract Price:
1. Fixed Price Contract – 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
2. Cost-plus Contract – 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.
Long-term contracts frequently provide that seller (builder) may bill the customer at intervals. The most
common examples are as follows:
•
•
•
•
•
Development of military and commercial aircraft
High-rise buildings
Skyways, roads, and bridges
Weapons-delivery systems
Space exploration hardware
Revenue recognition depends on the performance obligation(s):
1. Percentage of Completion / Over Time
2. Cost Recovery Method or Zero-Profit Approach / Point in Time
Percentage of Completion / Over Time
Revenue should be recognized OVER TIME if it can reasonably estimate its progress toward satisfaction
of the performance obligations.
Revenue can be recognized over time if at least one of the following criteria is met:
1. The customer simultaneously receives and CONSUMES the benefit of the seller’s work as it is performed (e.g.,
service contracts such ass cleaning service or monthly payroll processing system) or
2. The customer CONTROLS the asset as it is created or enhanced i.e., when the company’s performance
CREATES or enhances an asset, (e.g., work in process or when a contractor builds an extension into a
customer’s existing school building), 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 to date even if the customer cancels the contract as when a company manufactures
customized product (performance does not create an asset with an alternative use and the supplier has an
enforceable right to payment for performance completed to date).
Company recognizes revenues and gross profits each period based upon the progress of the
construction-referred to as the percentage-of-completion method (OVER TIME). Most popular input
measure used to determine the progress toward completion is the cost-to-cost method.
Cost Recovery Method or Zero-Profit Approach / Point in Time
If criteria (1 or 2 or 3 above) is not met, revenue should be recognized at a point in time (the company
recognizes revenues and gross profit when the contract is completed) referred to as the cost-recovery
(zero-profit) method/POINT in TIME. This method recognizes revenue only to the extent of costs incurred
that are expected to be recoverable. Only after all costs are incurred when gross profit will be
recognized.
The performance obligation is satisfied when control of the goods or services is transferred from the
seller to the customer.
Usually transfer of control is obvious, and coincides with delivery.
Other indicators of transfer of control, the customer has (PAROL):
1. An obligation to pay the seller.
2. Legal title to the asset.
3. Physical possession of the asset.
4. Assumed the risks and rewards of ownership.
5. Accepted the asset.
The indicators (No. 1 to 5 as mentioned above) indicates that control has been transferred from the seller to the
customer (the customer is more likely to control a good or service if the customer has those indicators).
Sellers should evaluate these indicators individually and in combination to decide whether control has been
transferred and revenue can be recognized.
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AFAR-04
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Week 5: CONSTRUCTION ACCOUNTING
Method of Recognizing Revenue in Construction Accounting:
A. Percentage-of-completion method (Over Time) – when the outcome of the construction contract can
be estimated reliably, contract revenue and costs associated with the contract should be recognized
as revenue and expenses, respectively, by reference to the stage of completion of the contract activity
at the balance sheet date since there is a reasonable estimate of its progress toward satisfaction of the
performance obligation.
Measuring Stage of Completion. The stage of completion of a contract may be determined in a variety
of ways. The enterprise uses the method that measures reliably the work performed. Depending on the
nature if the contract, the methods may include:
1. Input Measures/Cost Basis. Input measures are made in relation to the costs or efforts devoted to
a contract. Input methods recognize revenue on the basis of the efforts or inputs to satisfy the
performance obligation relative to the total expected inputs. Examples of input methods include
labor-hours worked; costs incurred; time elapsed; resources consumed. Revenue can be
recognized on a straight-line basis if inputs are used evenly throughout the performance period.
a. Cost-to-cost method (Proportion of contract costs incurred). Perhaps the most popular of the
input measures is the cost-to-cost method. Under this method, the degree of completion is
determined by comparing costs already incurred with the most recent estimates of total
expected costs to complete the project.
The percentage that costs incurred bear to total expected costs is applied to the contract
price to determine the revenue to be recognized to date as well as to the expected net
income on the project in arriving at earnings to date. Some of the costs incurred, particularly
in the early stages of the contract, should be disregarded in applying this method because
they do not relate directly to effort expended on the contract.
These include such items as subcontract costs for work that has yet to be performed and
standard fabricated materials that have not yet been installed. One of the most difficult
problems in using this method is estimating the costs yet to be incurred. Engineers are often
consulted to help provide estimates as to a project’s percentage of completion. How difficult
the estimation process may be, it is required in reporting income, regardless of how the
percentage of completion is computed.
b. Efforts-expended methods. The efforts-expended methods are based on some measure of
work performed. They include labor hours, labor pesos, machine hours, or material quantities.
In each case, the degree of completion is measured in a way similar to the use in the cost-tocost approach: the ratio of the efforts expended to date to the estimated total efforts to be
expended on the entire contract.
For example, if the measure of work performed is labor hours, the ratio of hours worked to
date to the total estimated hours would produce the percentage for use in measuring income
earned.
2. Output Measures/Sales Basis. Output measures are made in terms of results achieved. Examples
of output methods include; surveys of work performed or performance completed to date (the
value of “work certified” to date may be a measure used to identify the degree of completion
and therefore revenue to be recognized in profit or loss); units produced or delivered; tons
produced; storey’s of a building completed; appraisals of results achieved; kilometers of a
highway completed; contract milestones reached or achieved; time elapsed and values added.
For example, if the contract calls for units of output, such as kilometers of roadway, a measure of
completion would be a ratio of the miles completed to the total kilometers in the contract.
Output methods should only be used when the output selected represents performance towards
complete satisfaction of the performance obligation. The disadvantage of output methods is that
the outputs used may not be available or directly observable. When this is the case, an input
method may be necessary.
Architects and engineers are sometimes asked to evaluate jobs and estimate the percentage of
a job completed (surveys of work performed). These estimates are, in reality, output measures
and usually are based on the physical progress made on the contract. This may be appropriate
for the construction of buildings.
Output measures are of two types:
a. Proportional Cost Approach – the costs incurred computed under this method may not
equal to the actual costs incurred.
b. Actual Cost Approach – the costs incurred computed under this method should be equal
to the costs actually incurred.
The Proportional Cost and Actual Cost Approach are equally acceptable.
It should be noted that progress payments and advances from customers often do not reflect the
work performed.
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AFAR-04
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Week 5: CONSTRUCTION ACCOUNTING
B. Cost Recovery Method/Zero-Profit Approach (Point In Time). Cost recovery method of construction
accounting (zero-profit approach) is used when the contract’s outcome cannot be reliably estimated.
The treatment below should be followed:
1. Recognize revenue only to the extent of contract costs incurred which are expected to be
recoverable; and
2. Recognize contract costs as an expense in the period they are incurred. Only after all costs are
incurred is gross profit recognized.
In other words, the cost recovery method gives rise to zero profit. A zero-profit approach involves
recognizing revenues equal to the amount of costs incurred during the period so that no net profit is
recognized. But as soon as the ultimate outcome of a contract can be estimated, the percentage-ofcompletion is applied.
This no profit/no loss approach reflect the situation near the beginning of a contract, i.e., the outcome
cannot be reliably estimated, but it is likely to recover the costs.
Contract costs that cannot be recovered should be recognized as an expense immediately. The
following are situations where this might occur:
• The contract is not fully enforceable, i.e. its validity is seriously questioned;
• The completion of the contract is subject to the outcome of pending litigation or legislation;
• The contract relates to properties which will probably be expropriated or condemned;
• The customer is unable to meet its obligations under the contract; and
• The contractor cannot complete the contract or in any other way meets his/her obligations
under the contract.
When these uncertainties cease to exist, the contract revenue and costs should be recognized as
normal by reference to the stage of completion.
PFRS (IFRS) 15 states that the following cost must be capitalized:
1. The incremental costs of obtaining a contract
2. The cost of fulfilling a contract if they do not fall within the scope of another standard [such as PAS
(IAS) 2 – Inventories] and the entity expects them to be recovered.
Companies divide cost to fulfill a contract or fulfillment costs (contract acquisition costs) into two
categories:
• Those that give rise to an asset.
• Those that are expensed as incurred.
The capitalized costs will be amortized as revenue is recognized. This means that they will be expensed to
cost of construction/sales as the contract progresses.
Construction costs should comprise of:
1. Costs that relate directly to the specific contract;
2. Costs that are attributable to contract activity in general and can be allocated to the contract,
such as insurance, cost of design and technical assistance not directly related to a specific contract
and construction overheads; and
3. Such other costs which are specifically chargeable to the customer under the terms of the contract,
which may include general administration costs and development costs.
Costs that relate directly to a specific contract include the following:
1. Site labor costs, including site supervision;
2. Costs of materials used in construction;
3. Depreciation of plant and equipment used on the contract;
4. Cost of moving plant, equipment and materials to and from the contract site;
5. Cost of hiring plant and equipment;
6. Cost of design and technical assistance that are directly related to the contract;
7. Estimated costs of rectification and guarantee work, including expected warranty costs; and
8. Claims from third parties.
General contract activity costs should be allocated systematically and rationally, and all costs with similar
characteristics should be treated consistently. The allocation should be based on the normal level of
construction activity. Borrowing cost may be attributed in this way.
Costs that may be attributable to contract activity in general and can be allocated to specific contracts
include:
1. Insurance;
2. Costs of design and technical assistance that are not directly related to a specific contract;
3. Construction overheads
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AFAR-04
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Week 5: CONSTRUCTION ACCOUNTING
Some costs cannot be attributed to contract activity and so the following should be excluded from
construction costs:
1. General administration costs (unless reimbursement is specified in the contract);
2. Research & Development (unless reimbursement is specified in the contract);
3. Depreciation of idle plant and equipment not used on any particular contract;
4. Cost of wasted materials, labor or other resources; and
5. Costs that related to satisfied performance obligations
Special Issues on Recognition of Contract Costs
• Costs are recognized in the same proportion that applies to the recognition of revenue, except for
the following.
▪ Abnormal costs (e.g. to rectify an error in the production or service process) are expensed as
incurred; and
▪ Input costs that are not proportionate to the construction process.
•
If an incurred cost is not proportionate to the progress in the satisfaction of the performance
obligation that cost shall be excluded when measuring the progress of the contract. A cost incurred
that is not proportionate to the progress towards completion is excluded from the measurement of
progress.
•
In this situation revenue will be recognized to the extent of the actual cost incurred in respect of
that component
•
Companies recognize an asset for the incremental costs (or incremental costs of obtaining a
contract) if these costs are incurred to obtain a contract with a customer. In other words,
incremental costs are those that a company would not incur if the contract had not been obtained,
such as:
a. Sales commissions;
b. Direct labor, direct materials, and allocation of costs that relate directly to the contract (e.g.,
costs of contract management and supervision, insurance, and depreciation of tools and
equipment); and;
c. Costs that generate or enhance resources of the company that will be used in satisfying
performance obligations in the future. Such costs include intangible design or engineering
costs that will continue to give rise to benefits in the future.
Other costs that are expensed as incurred include general and administrative expenses (unless those costs
are explicitly chargeable to the customer under the contract) as well as costs of waste, labor, or other
resources to fulfill the contract that were not reflected in the price of the contract.
In summary, companies only capitalize costs that are direct, incremental, and recoverable (assuming that
the contract period is more than one year).
Recognition of Expected or Anticipated Losses
When it is probable that total contract costs will exceed total contract revenue, the expected
(anticipated) loss should be recognized as an expense (or loss) immediately.
The amount of such loss is determined irrespective of:
1. Whether or not the work has commenced on the contract;
2. The stage of completion of contract activity; or
3. The amount of profits expected to arise on other contracts which are not treated as a single
construction contract.
Long-term Contract Losses
Two types of losses can become evident under the long-term contracts:
1. Loss in Current Period on a Profitable Contract; and
2. Loss on an Unprofitable Contract.
Under PFRS 15, the loss in Current Period on a Profitable Contract and Loss on an Unprofitable Contract are
similarly accounted for.
Profitable Contract – Loss in Current Period. This situation happens when, during the construction, there is a
significant increase in the estimated total contract costs but the increase does not eliminate all profits on
the contract.
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AFAR-04
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Week 5: CONSTRUCTION ACCOUNTING
Financial Statement Presentation
Percentage-of-Completion/Over Time
During the life of the contract, the difference between the Construction In Progress and the Progress Billings
is reported in the statement of financial position as follows:
• Current asset – Contract Asset. It comprises of total costs incurred on the contract, plus the
cumulative recognized profit (or less cumulative recognized loss), less progress billings (i.e., the
amounts actually invoiced to customers for work performed on a contract whether or not they have
been paid by the customers).
• Current liability – Contract Liability. It comprises of progress billings less total costs incurred on the
contract, plus cumulative recognized profit (or less cumulative recognized loss).
Cost Recovery Method/Point In Time
During the life of the contract, the difference between the Construction In Progress and the Progress Billings
is reported in the statement of financial position as follows:
• Current asset – Contract Asset. It comprises of total costs incurred on the contract, less progress
billings (i.e., the amounts actually invoiced to customers for work performed on a contract whether
or not they have been paid by the customers).
• Current liability – Contract Liability. It comprises of progress billings less total costs incurred on the
contract.
Financial Statement Presentation – Multiple Contracts
When companies have more than one project going at a time and costs exceed billings on some contracts
and billings exceeds cost on others. In such case, the company segregates the presentation of the said
contracts.
The asset portion includes only those contracts on which costs and recognized profits exceed billings. While,
the liability side includes only those on which on which billings exceed costs and recognized profits.
Separate disclosures of the peso volume of billings and costs are preferable to a summary presentation for
the difference.
I – Performance Obligations
1. Inting Corporation constructs highly specialized communication satellites. A customer in Hong Kong
recently placed an order for a cable TV satellite at a price of P20 million. The order was placed in April
20x6, and the satellite is to be delivered in one year. The customer has guaranteed to pay in full at the
end of 20x6, regardless of progress or cancellation. Inting uses “proportion of time” as its measure of
progress toward completion. When should Inting recognize revenue: at completion, or as the
construction is performed?
a. Over time
c. No revenue recognized
b. Point in time
d. No performance obligation
2. DJD Construction is constructing a building for Hotel Dian. Under the construction agreement, if for any
reason DJD can’t complete construction, Hotel Dian would own the partially completed building and
could hire another construction company to complete the job. When should DJD recognize revenue:
as the building is constructed, or after construction is completed?
a. Over time
c. No revenue recognized
b. Point in time
d. No performance obligation
3. Crown Construction Company entered into a contract with Star Hotel for building a highly sophisticated,
customized conference room to be completed for a fixed price of P400,000. Nonrefundable progress
payments are made on a monthly basis for work completed during the month. Legal title to the
conference room equipment is held by Crown until the end of the construction project, but if the
contract is terminated before the conference room is finished, Star retains the partially completed job
and must pay for any work completed to date. When should revenue be recognized?
a. No transaction
c. Point in Time
b. No revenue
d. Over Time
4. Regent Company entered into a contract with Star Hotel for constructing and installing a standard
designed gym for a fixed price of P400,000. Nonrefundable progress payments are made on a monthly
basis for work completed during the month. Legal title to the gym passes to Star upon completion of the
building process. If Star cancels the contract before the gym construction is completed, Regent removes
all the installed equipment and Star must compensate Regent for any loss of profit on sale of the gym to
another customer. When should Silica recognize revenue?
a. No transaction
c. Point in Time
b. No revenue
d. Over Time
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AFAR-04
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Week 5: CONSTRUCTION ACCOUNTING
5. Assume DJD International Tower (Phase II) is developing luxury residential real estate and begins to
market individual apartments during their construction. The Tower entered into a contract with Edwards
for the sale of a specific apartment. Edwards pays a deposit that is refundable only if the Tower fails to
deliver the completed apartment in accordance with the contract. The remainder of the purchase
price is paid on completion of the contract when Edwards obtains possession of the apartment. When
should revenue be recognized?
a. No transaction
c. Point in Time
b. No revenue
d. Over Time
6. On January 1, 20x6, Silver Construction Company signed a contract to build a custom garage for a
customer and received P10,000 in advance for the job. The new garage will be built on the customer’s
land. To complete this project, Silver must first build a concrete floor, construct wooden pillars and walls,
and finally install a roof. Silver normally charges stand-alone prices of P3,000, P4,000, and P5,000,
respectively, for each of these three smaller tasks if done separately. How many performance
obligations exist in this contract?
a. 0
c. 2
b. 1
d. 3
7. VJD Construction specializes in designing and installing customized manufacturing equipment. On
February 1, 20x7, it signs a contract to design a fully automated wristwatch assembly line for P2 million,
which will be settled in cash upon completion of construction. VJD Construction will install the equipment
on the client’s property, furnish it with a customized software package that is integral to operations, and
provide consulting services that integrate the equipment with VJD Construction’s other assembly lines.
How many performance obligations exist in this contract?
a. 0
c. 2
b. 1
d. 3
II – Transaction/Contract Price with Variable Consideration
1. DJ Builders Construction enters into a contract with a customer to build a warehouse for P850,000 on
March 30, 20x5 with a performance bonus of P50,000 if the building is completed by July 31, 20x5. The
bonus is reduced by P10,000 each week that completion is delayed. DJ Builders commonly includes
these completion bonuses in its contracts and, based on prior experience, estimates the following
completion outcomes:
Completed by
Probability
July 31, 20x5
65%
August 7, 20x5
25%
August 14, 20x5
5%
August 21, 20x5
5%
The transaction price amounted to:
a. P895,000
c. P585,000
b. P850,000
d. P552,500
2. DJD Builders Construction Company enters into a contract with a customer to build a 50 kilometers road
for P100,000,000, with a performance bonus of P60,000,000 that will be paid based on the timing of
completion. The amount of the performance bonus decreases by 10% per week for every week beyond
the agreed-upon completion date. The contract requirements are similar to contracts that DJD Builders
has performed previously, and management believes that such experience is predictive for this
contract. Management estimates that there is a 60% probability that the contract will be completed by
the agreed-upon completion date, a 30% probability that it will be completed one week late, and only
a 10% probability that it will be completed two weeks late. Determine the probability-weighted amount
for the management to determine the transaction price.
a. P 96,000,000
c. P142,200,000
b. P111,000,000
d. P157,000,000
III – Entries, Revenue, Costs and Gross Profit Computation; F/S Presentation
In 2019, DJ Builders Construction agreed to construct an apartment building at a price of P500,000. The
information relating to the costs and billings for the contract is as follows:
2019
2020
2021
Direct and allocable costs to date (materials delivered to
site, architects’ and surveyors’ fees, direct labor costs
allocated overhead costs and equipment’s depreciation).P 140,000 P 300,000* P 392,500
Estimated costs yet to be incurred………………....................... 260,000
100,000
-0Customer billings each year………………………....................... 187,500
140,000
182,500
Collection of billings each year……………………...................... 140,000
160,000
210,000
During 2020 the customer agrees to a variation with increases expected revenue from the contract by
P10,000 and causes additional costs of P5,000. At the end of 2020 there are materials stored on site for use
during the following period (2021) which cost P4,000*.
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AFAR-04
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Week 5: CONSTRUCTION ACCOUNTING
Required:
A. Prepare journal entries each year using:
1. Percentage-of-completion method/Over Time
2. Cost recovery method of construction accounting/Point in Time (Hybrid Method or Zero-profit
Approach). Assuming that at the beginning and end of 2019 (also in 2020) the contractor cannot
estimate the outcome of the contract with sufficient reliability to estimate the project’s percentage
of completion (i.e., because of the uncertainties arising from the new design and new materials the
entity cannot estimate total expected contract costs with sufficient reliability). It is highly likely that
the contract price will be received from the customer. However it is probable that the costs incurred
in 2019 and 2020 will be recoverable. The contract was completed in 2021.
B. For each year show how the details related to this contract would be disclosed on the balance sheet
and on the income statement:
Percentage-of-completion Method/Over Time:
1. In its December 31, 2019 balance sheet, DJ Builders would report:
a. The contract/current asset, cost and profits in excess of billings, P12,500.
b. The contract/current liability, billings in excess of cost and profits, P12,500.
c. The contract/current asset, contract amount in excess of billings, of P312,500.
d. The contract/current asset, deferred profit of P72,500.
2. In its December 31, 2020 balance sheet, DJ Builders would report:
a. The contract/current asset, cost and profits in excess of billings, P49,900.
b. The contract/current liability, billings in excess of cost and profits, P49,900.
c. The contract/current asset, contract amount in excess of billings, of P37,500.
d. The contract/current liability, deferred profit of P46,400.
3. In its December 31, 2021 balance sheet, DJ Builders would report in relation to the Construction in
Progress and Contract Billings Account:
a. The contract/current asset, P500,000.
b. The contract/current liability, P500,000.
c. The Construction-In-Progress Account of P500,000 and Contract Billings of P392,500.
d. None.
4. In its December 31 yearly income statement, the recognize revenue:
2019
2020
2021
2019
2020
2021
a. P175,000 P202,400 P132,600
c. P140,000 P300,000 P392,500
b. P 35,000 P 81,400 P117,500
d. P
0 P
0
P510,000
5. In its December 31 yearly income statement, the Construction Costs):
2019
2020
2021
2019
2020
2021
a. P140,000 P160,000 P 92,500
c. P 140,000 P 160,000 P 96,500
b. P140,000 P156,000 P 96,500
d. P
0
P
0
P 392,500
6. In its December 31 yearly income statement, the gross profit would be:
2019
2020
2021
2019
2020
2021
a. P 35,000 P 75,000 P107,500
c. P132,500 P160,000 P200,000
b. P 35,000 P 46,400 P 36,100
d. P
0
P
0
P107,500
Cost Recovery Method of Construction Accounting/Point in Time
7. In its December 31, 2019 balance sheet, DJ Builders report:
a. The contract/current asset, cost and profits in excess of billings, P47,500.
b. The contract/current liability, billings in excess of cost, P47,500.
c. The contract/current asset, contract amount in excess of billings, of P312,500.
d. The contract/current asset, P140,000; deferred profit of P187,500.
8. In its December 31, 2020 balance sheet, DJ Builders report:
a. The contract/current asset, cost and profits in excess of billings, P31,500.
b. The contract/current liability, billings in excess of cost, P31,500.
c. The contract/current asset, contract amount in excess of billings, of P156,000.
d. The contract/current asset, P156,000; current/contract liability deferred profit of P140,000.
9. In its December 31, 2021 balance sheet, DJ Builders would report in relation to the Construction in
Progress and Contract Billings Account:
a. The contract/current asset, 510,000.
b. The contract/current liability, P510,000.
c. The Construction-In-Progress Account of P510,000 and Contract Billings of P392,500.
d. None.
10. In its December 31 yearly income statement, the recognize revenue would be:
2019
2020
2021
2019
2020
2021
a. P140,000 P156,000 P214,000
c. P140,000 P 40,000 P200,000
b. P140,000 P300,000 P510,000
d. P
0
P
0
P500,000
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AFAR-04
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Week 5: CONSTRUCTION ACCOUNTING
11. In its December 31 yearly income statement, the Construction Costs:
2019
2020
2021
2019
2020
2021
a. P140,000 P156,000 P 96,500
c. P 140,000 P300,000 P392,500
b. P400,000 P400,000 P392,500
d. P
0
P
0
P392,500
12. In its December 31 yearly income statement, the gross profit:
2019
2020
2021
a. P 35,000 P 75,000 P107,500
b. P 35,000 P 40,000 P 32,900
c. P132,900 P160,000 P200,000
d. P
0
P
0
P117,500
IV – Reconstruction
In 2019, PJD Construction Corporation began construction work under a 3-year contract. The contract
price was P2,000,000. PJD uses the percentage-of-completion method/over time for financial accounting
purposes. The income to be recognized each year is based on the proportion of costs incurred to total
estimated costs for completing the contract. The financial statement presentation relating to this contract
at December 31, 2019 was as follows:
Balance Sheet
Accounts Receivable – construction contract billings……………
P 43,000
Construction-in-progress…………………………………………………P130,000
Less: Contract Billings…………………………………………………….. 123,000
Costs of uncompleted contract in excess of billings………………
7,000
Income Statement/Statement of Comprehensive Income
Gross profit (before tax) recognized in 2019………………………..
P 36,400
1. How much was collected in 2019 on this contract?
a. P7,000
c. P 80,000
b. P43,000
d. P123,000
2. What was the initial estimated gross profit before tax on this contract?
a. P36,400
c. P130,000
b. P93,600
d. P560,000
3. What is the percentage of completion for the year ended?
a. 6.50%
c. 28.00%
b. 13.00%
d. 100.00%
4. What is the gross profit rate on the contract?
a. 6.50%
c. 28.00%
b. 13.00%
d. 100.00%
5. What is the recognized revenue to date at the end of 2019?
a. P36,400
c. P130,000
b. P93,600
d. P560,000
6. What is the recognized revenue in 2019?
a. P36,400
b. P93,600
c. P130,000
d. P560,000
V – Reconstruction
DJ Builders Construction Company has used the cost-to-cost percentage of completion method of
recognizing revenue. Ambrose assumed leadership of the business after the recent death of his father. In
reviewing the records, Ambrose finds the following information regarding a recently completed building
project for which the total contract was P2,000,000.
2019
2020
2021
Gross profit (loss) each year
P 40,000
P 140,000
P( 20,000)
Costs incurred each year
360,000
?
820,000
Ambrose wants to know how effectively the company operated during the last 3 years on this project and
since the information is not complete, has asked for answers to the following questions:
1. How much cost was incurred in 2020?
a. P660,000
c. P1,180,000
b. P820,000
d. P1,840,000
2. What percentage of the project was completed by the end of 2020?
a. 40%
c. 60%
b. 51%
d. 90%
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Week 5: CONSTRUCTION ACCOUNTING
3. What was the percentage of completion during the year 2020?
a. 20%
c. 60%
b. 40%
d. 100%
4. What was the estimated gross profit on the project by the end of 2020?
a. P140,000
c. P180,000
b. P160,000
d. P300,000
5. What was the estimated cost to complete the project at the end of 2020?
a. P 660,000
c. P1,020,000
b. P 680,000
d. P1,700,000
VI – Unprofitable Contract
GEI Enterprise entered into a construction agreement in 20x4 that called for a contract price of P9,600,000.
At the beginning of 20x5, a change order increase the initial contract price by P480,000. In relation to the
project, the following data were obtained:
Costs incurred to date . . . . . . . . . .
Estimated costs to complete . . . .
Billings made to date . . . . . . . . . . .
Collections made to date . . . . . . .
20x4
P4,920,000
4,920,000
5,280,000
4,920,000
20x5
P8,640,000
2,160,000
8,700,000
8,700,000
Compute the amount of construction in progress (net)/contract assets or progress billings (net)/contract
liabilities for the year 20x5:
Percentage-of-completion
Cost Recovery Method
Method (Over Time)
of Construction Accounting (Point In Time)
a.
P780,000 -- liabilities
P 780,000 – liabilities
b.
780,000 – assets
780,000 – assets
c.
60,000 – liabilities
60,000 – liabilities
d.
636,000 – liabilities
636,000 – liabilities
VII – Comparing Input and Output Measures
TJD Construction Company won the recently concluded public bidding wherein the contract was
awarded starting January 7, 2019, to construct a bridge for a contract price of P16,800,000 payable in five
installments, of which one-fifth (1/5) of the price to be paid upon completion of each quarter of work, with
the final payment due within ten days (as agreed per contract) after the turnover of the acceptance of
the bridge.
By December 31, 2019, three-quarters of the bridge was completed which was estimated by the
company’s engineering department; whereupon the third billing was made (cash had been made on the
previous two billings).
During 2019, a total of P8,400,000 had been paid for costs incurred, and total liability for construction
materials purchased still amounted to P2,000,000. It is estimated that an additional P3,600,000 would be
required to complete the construction of the bridge.
Using the percentage-of-completion/over time to recognize revenue:
1. Using input measure (cost basis) – cost-to-cost method, the realized gross profit for 2019:
a. P2,080,000
c. P2,200,000
b. P2,100,000
d. P2,800,000
2. Using output measure (sales basis) – proportional cost approach (engineering estimates), the balance
of “Construction in Progress – net” at the end of 2019 (CA – current asset; CL – current liability):
a. P2,420,000 CA
c. P12,500,000 CA
b. P2,420,000 CL
d. P 320,000 CL
3. Using output measure (sales basis) – actual cost (measure of completion to be applied to revenues)
approach (engineering estimates), the realized gross profit for 2019:
a. P2,080,000
c. P2,200,000
b. P2,100,000
d. P2,800,000
4. Using output measure (sales basis) – actual cost (measure of completion to be applied to gross profit)
approach (engineering estimates), the realized gross profit for 2019:
a. P2,080,000
c. P2,200,000
b. P2,100,000
d. P2,800,000
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Week 5: CONSTRUCTION ACCOUNTING
VIII – Output (Sales Basis) and Input Measure (Cost Basis)
VJD International Inc. recently acquired the Vince Builders Company. Vince has incomplete accounting
records. On one particular project, only the information is available.
2019
2020
2021
Costs incurred during the year……………………………….....P200,000 P 250,000
?
Estimated cost to complete…………………………………......
?
190,000
0
Recognized revenue……………………………………………... 220,000
?
?
Gross profit on contract………………………………………......
?
10,000 (P10,000)
Contract price……………………………………………………... 700,000
Because the information is incomplete, you are asked the following questions assuming the percentageof-completion method is used; an output measure (sales basis) is used to estimate the percentage
completed, and revenue is recorded using the actual cost approach.
1. How much gross profit should be reported in 2019?
2. How much revenue should be reported in 2020?
3. How much revenue should be reported in 2021?
4. How much cost was incurred in 2021?
5. The total costs of the contract?
6. What would be the construction revenue, costs of revenue and gross profit for 2019 and 2020
assuming that in 2019, the outcome of the construction contract cannot be estimated reliably (no
estimated cost to complete). (Ignore the revenue amount shown for 2019 and gross profit amount
reported for 2020.)
7. What would be the gross profit for 2020 if the cost-to-cost percentage-of-completion method/input
method (cost basis) were used rather than the output measure assuming that the estimated cost
to complete in 2019 amounted to P450,000? (Ignore the revenue amount shown for 2019 and gross
profit amount reported for 2020.)
SOLUTIONS TO SELECTED PROBLEMS
Problem III – DJ Builders
Contract Price
Cost Incurred Each Year (CIEY)
+: Cost Incurred in Prior Years (CIPY)
Cost (actual) Incurred to Date
+: Estimated Cost to Complete
Total Estimated Cost
Estimated Gross Profit
x: Percentage of Completion (CI to
date/TEC)
Recognized Gross Profit to Date
Less: Recognized Gross Profit in Prior Yr(s)
RGP Each Year - % of Completion Method
RGP Each Year – Cost Recovery Method
2019
500,000
140,000
____-0140,000
260,000
400,000
100,000
140/400
or 35%
35,000
____-035,000
2020
*510,000
160,000
140,000
**300,000
100,000
400,000
110,000
(300-4)/400
___or 74%
81,400
_35,000
46,400
____-0-
_____-0-
or
2021
*510,000
92,500
300,000
392,500
_____-0392,500
117,500
2021
***96,500
***296,000
392,500
____100%
117,500
_81,400
36,100
117,500
* P500,000 + P10,000 variations in contract;
**to date means it include the additional costs of P5,000
***or CIEY – 2021, P92,500 + P 4,000 = P96,500; CIPY, P300,000 – P4,000 = P296,000
Journal Entries: Percentage of Completion/Over Time
(000’s omitted)
1. To record Cost Incurred Each Year
Construction in Progress (CIP)
Materials Inventory
Cash, payables, materials, etc.
2. Progress / Contract Billings
Accounts receivable
Progress billings
3. Collections
Cash
Accounts receivable
4. Recognized Rev., Cost & GP
Cost of Construction
CIP
Revenue from Construction
5. To close CIP and Progress Billings
Progress billings
Construction in Progress
Page 10 of 13
2019
2020
140
2021
156.0
4.0
140
187.5
96.5
140
187.5
140
182.5
140
160
140
140
35
4.0
92.5
160.0
182.5
210
160
156.0
46.4
175
210
96.5
36.1
202.4
132.6
510
510
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Week 5: CONSTRUCTION ACCOUNTING
Journal Entries: Cost Recovery Method/Point In Time
(000’s omitted)
2019
1. To record Cost Incurred Each Year
Construction in Progress (CIP)
140
Materials Inventory
Cash, payables, materials, etc.
2. Progress / Contract Billings
Accounts receivable
187.5
Progress billings
3. Collections
Cash
140
Accounts receivable
4. Recognized Rev., Cost & GP
Cost of Construction
140
CIP
-0Revenue from Construction
5. To close CIP and Progress Billings
Progress billings
Construction in Progress
2020
2021
156
4
140
96.5
4.0
92.5
160
140
187.5
182.5
140
160
140
182.5
210
160
156
-0-
140
210
96.5
117.5
156
214
510
510
Or, alternative approach - % of Completion Method / Over Time
Recognized
To Date
2019
Recognized
in Prior Years
Recognized in
Current Year
175,000
-0-
175,000
140,000
-0-
140,000
35,000
-0-
35,000
Revenue (P510,000 x 74%)
Cost (P400,000 x 74%)
Gross Profit (P110,000 x 74%)
377,400
***296,000
81,400
175,000
140,000
35,000
202,400
156,000
46,400
Revenue (P510,000 x 100%)
Cost (P392,500 x 100%)
Gross Profit (P117,500 x 100%)
510,000
392,500
117,500
377,400
296,000
81,400
132,600
***96,500
36,100
Revenue (Contract Price x % of completion)
(500,000 x 35%)
Cost (Total Est’d. Cost x % of completion)
(P400,000 x 35%)
Gross Profit (Est’d. Gross Profit x % of
completion)
(P100,000 x 35%)
2020
2021
Or, alternative approach – Cost Recovery Method/Zero-Profit Approach/Point In Time
Recognized
Recognized
Recognized in
To Date
in Prior Years Current Year
2019
Revenue (equivalent to Costs Incurred)
140,000
-0140,000
Cost
140,000
-0140,000
Gross Profit
-0-0-02020
Revenue (equivalent to Costs Incurred)
Cost
Gross Profit
296,000
296,000
-0-
140,000
140,000
-0-
156,000
156,000
-0-
Revenue
Cost
Gross Profit
510,000
392,500
117,500
296,000
296,000
-0-
214,000
96,500
117,500
2021
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Week 5: CONSTRUCTION ACCOUNTING
Problem IV – PJD Construction
2019
Contract Price
Less: Total Estimated Cost
Cost Incurred Each Year
+: Cost Incurred in Prior Years
Cost Incurred to Date
+: Estimated Cost to Complete
Total Estimated Cost
Estimated Gross Profit
x: Percentage of Completion (CI to date/TEC)
Gross Profit to Date
Less: Gross Profit in Prior Yr(s)
GP (L) Each Year - % of Completion Method
4,000,000
Problem V – DJ Builders
2019
Contract Price
Less: Total Estimated Cost
Cost Incurred Each Year
+: Cost Incurred in Prior Years
Cost Incurred to Date
+: Estimated Cost to Complete
Total Estimated Cost
Estimated Gross Profit
x: Percentage of Completion (CI to date/TEC)
Gross Profit to Date
Less: Recognized Gross Profit in Prior Yr(s)
GP (L) Each Year - % of Completion Method
Problem VII
2020
2,000,000
2,000,000
360,000
_____0__
360,000
_______
_______
?
_______
820,000
_______
?
_______
?
?
_______
_______
140,000
_______
_______
_______
_______
40,000
Requirement 1
% of Completion
Input - Cost to Cost
2019
_______
Contract Price
Cost Incurred Each Year
+: Cost Incurred in Prior Years
Cost (actual) Incurred to Date
+: Estimated Cost to Complete
Total Estimated Cost
Estimated Gross Profit
x: Percentage of Completion (CI to date/TEC)
Gross Profit to Date
Less: Recognized Gross Profit in Prior Yr(s)
GP Each Year
2021
2,000,000
_______
_______
(20,000)
Requirement 2
% of Completion
Output-Proportional
2019
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
% of Completion Method (OT) - Proportional Cost Approach
Recognized
To Date
2019
Revenue (Contract Price x % of
completion)
Recognized
in Prior Years
Recognized in
Current Year
Recognized
in Prior Years
Recognized in
Current Year
Cost (Total Est’d. Cost x % of completion)
Gross Profit (Est’d. Gross Profit x % of
completion)
% of Completion Method (OT) – Actual Cost Approach (Revenue)
Recognized
To Date
2019
Revenue
Cost
Gross Profit
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Week 5: CONSTRUCTION ACCOUNTING
% of Completion Method (OT) – Actual Cost Approach (Gross Profit)
Recognized
Recognized
To Date
in Prior Years
Recognized in
Current Year
2019
Revenue
Cost
Gross Profit
Problem VIII
Contract Price
Cost Incurred Each Year
+: Cost Incurred in Prior Years
Cost (actual) Incurred to Date
+: Estimated Cost to Complete
Total Estimated Cost
Estimated Gross Profit
x: Percentage of Completion (CI to
date/TEC)
Gross Profit to Date
Less: Recognized Gross Profit in Prior
Yr(s)
GP Each Year
Requirement 6
Cost Recovery (PT)
2019
2020
_______
_______
Requirement 7
- % of Completion (OT)
2019
2020
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
GOD BLESS YOU ALWAYS!!!
*The only thing that stands between a man and what he wants from life is often merely the will
to try it and the faith to believe that it is possible.*
*Don’t be afraid of shortcomings, because they are what will make you better. Stay on the right
track, Continue to pray and things will work out for you.*
*It is better to fail in doing something, than to excel in doing nothing.*
*For even a flawed diamond is more valuable than a perfect brick. And people who have no
failures also have few victories.*
*Sometimes a winner is just a dreamer who never gave up.*
*The spirit, the will to win, and the will to excel are the things that endure.*
*These qualities are so much important than the events that occur.*
*A dream unrealized is a dream imprisoned by that enemy of all enemies, the fear of failure.
Set that dream free by determining that you will make it happen.*
*Don’t let your learning lead to knowledge; let your learning lead to action.*
*Every great success was, at the beginning impossible*
*The secret of life is not just to live, but to have something worthwhile to live for.*
*Great achievements are not done by strength but by perseverance*
*No one knows what he can do until he tries*
*Not knowing when the dawn will come, I open every door*
*The great thing in the world is not so much where you are but in what direction you are going*
*No act of kindness, no matter how small is ever wasted.*
*One individual plus courage is a majority.*
*Never take direction from a crowd for your personal life.*
*And never choose to quit just because somebody disagrees with you*
*There is no great and no small
To the Soul that makes it all:
And where it comes, all things are equal;
And it comes everywhere.*
Your mind was framed to succeed
Your hand was armed with skill,
Your face was the mould of great faith and courage,
And your HEART with the throne of will.
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