LONG TERM CONSTRUCTION CONTRACTS

Theory on the date and particular column:

1. The first of the 5 step model is identifying the contract or agreement with the customer
and touches on the following features: that collectability of consideration is probable,
contracting parties have approved the contract, rights of each party regarding the goods or
services to be transferred can be identified, and payment term is clearly provided.
Describe one more factor that is missing.
2. Even if the goods or services are distinct if these are substantially the same and have the
same pattern of transfer, the series of goods or services are considered as a one
performance obligation only and must be accounted for as revenue over time.
When collection is not highly probable, the entity may elect recognition of revenue in
installment based on gross profit percentage as an application of the percentage of
completion for long term contracts over time or in time as soon as the service/good is
delivered.
A. Only the first statement is true. C. Both statements are true.
B. Only the second statement is true. D. both statements are false.

3. If there are two or more performance obligations in one contract price, the relative stand
alone selling price method allocates the total contract price based on the stand alone selling
price of each identified performance obligation. The best method used as stand alone
selling price is based on the price which market is willing to pay called
A. market assessment approach C. fair value approach
B. expected cost plus margin approach D. residual approach
3. Situation 1, Nokia enters into a contract to construct a highly customized piece of software
subject to customer specification. If customer terminates contract for reasons other than
failure to perform by Nokia, customer should pay the cost incurred by Nokia plus 10%
variable fee. If contract is cancelled Nokia cannot use the product for other purposes such
as selling this to another customer or using this for their own regular operation. Nokia thus
has no alternative use for the product. Nokia should recognize revenue in time.
Situation 2. Nokia enters into a contract to build an IT System integrating the phases of
sales, procurement and accounting functions which will take more than a year to complete.
Work is done extensively within the customer’s place including test runs to determine its
operability. Throughout the different stages of development customer takes ownership and
physical possession of the system,. There is control of the IT System at different stages but
is not fully operational yet, Nokia should recognize revenue after work is completed.
A. Only the situation is true. C. Both situations are true.
B. Only the second situation is true. D. Both situations are false.
5. A customer ordered for a reprint of textbooks for 2,000 copies more right after 5,000
copies were delivered at a price of P200 per copy in Nov 2018. The contract provided for
a change in the newsprint used and both publisher and printer agreed on a price of P180
per copy. It was agreed that it be delivered in 2 batches, the first before the end of 2018.
Under IFRS 15 revenue to be recognized for 2018 will be based on the following
A. The reprint is considered distinct from the original goods delivered and the amount of
P180 is its stand alone price. Revenue is based on 2,000 cps at P180 per copy.
B. The reprint is considered distinct from the original goods delivered and the amount of
P180 is its stand alone price. Revenue is based on 1,000 cps at P180 per copy.
C. The reprint is not considered distinct from the original goods delivered and the
amount of P180 is its stand alone price. Revenue for the 2,000 should be recorded
using an allocated price of 180/380.
D. The reprint is considered distinct from the original goods delivered and the amount of
P180 is its stand alone price. Revenue for 6,000 should be recorded based on the sum
of 5,000 x P200 per cpy plus 1,000 x P180 per cpy.
6. Under the percentage of completion basis, Construction in Progress represents net
realizable value debited for actual construction costs and the mark-up or profit.
Progress billings is always a credit account used to charge customers and must be the

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 same as accounts receivable at all times.
A. Only the first statement is true. C. Both statements are true.
B. Only the second statement is true. D. both statements are false.
7. 1. Excess of Contract Billings over Construction in Progress (CIP) is a current liability.
2. Progress Billings is always deducted from Construction in Progress to arrive at a net value which
is either an asset or a liability account.
3. The percentage-of-completion in the second year of a three-year contract is based on total cost
to date divided by the estimated cost to complete
Which of these statements are correct?
A. Only no. 1 B. Only no. 2 C. 1 and 2 D. all are correct
8 When it has been reliably estimated that total contract costs will exceed total contract
revenue, the expected loss should be immediately recognized as a loss only when entity
commences work on the contract.
Amorsolo Co was commissioned by a client to deliver 5 wall paintings, each with a
different specification, to be delivered as it is completed. This will require the entity to
recognize revenue at delivery of each painting and exact payment from the customer.
A. Only the first case is true. C. Both cases are true.
B. Only the second case is true. D. both cases are false.
9. Telecom operators sell subscription plan and cell phone as one contract performance and
price. Revenue is recognized under IFRS 15
A. for the subscription plan with the cost of the cellphone as a marketing cost.
B. for the subscription plan and the cellphone based on the contract price
A. For the subscription plan and the cellphone based on an allocated amount on the
contract price.
B. For the subscription plan with the sales price of the cellphone charged as marketing
cost.
10. Control of an asset is defined as the ability to direct the use of and obtain substantially all of
the remaining benefits from the asset. The benefits that may be derived from the asset
may include using the asset to
I. produce goods or services.
II. enhance the value of other assets;
III. settle liabilities or to reduce expenses
IV. sell, exchange or pledge the asset to secure a loan

Which of the above is not considered a benefit?

C. All B. None c. III D. IV

11. A contract may contain elements of variable considerations such as:

I. rebates or discounts
II. refunds or bonuses
III. incentives or penalties
IV. addtl 5% bonus above the contract price if the project will be finished in two years

Which of the above is not considered a variable consideration which will affect contract price?
A. None B. only IV C. only III D. III and IV
12. In Franchise contracts, there are two franchise revenues that can be recognized:
I. continuing fee and II. initial fee.
How will revenue be recognized?
Overtime In Time
A. I II
B. II I
C. I and II
D. I and II
13. 1. The construction in progress account is an asset/inventory account representing net
realizable value accomplished on the contract at a point in time.

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 2.The aforementioned account is always a debit balance and is closed against the
progress billing account using percentage of completion or zero profit method.
3. The difference in the accounting approach between the two aforementioned methods
is in the use of the Progress Billing account.
Which of these statements is incorrect?
A. no. 1 B. no. 2 C. no. 3 D. 2 and 3 E. all
14. 1. At completion date, whatever is the proportion of revenue previously recognized, total
revenue should tally with the contract price less total construction cost.
2. The accounts receivable is always based on the progress billings made by the contractor.
3. The proportional approach or output measure given by an expert such as the engineer
is estimated based on machine hours, direct labor hours or quantity of materials used.
All of these statements are correct, except
A. no. 1 B. no. 2 C. no 3 D. 1 and 3 E.none
15. These statements are correct, except
1. Under the IFRS 15, revenue is recognized once control is passed over time or at a point of time.
2. Control may be indicated by physical possession of the asset.
3. Control is may also indicated if customer has a right to use the asset.
A. no. 1 B. no. 2 C. 3 D. all are correct

16. The CIP, PB and AR are reflected below for 2 years (2017 and 2018):
Contract in Progress Progress Billings Acccounts
Recble
1,800,000 2017 2,200,000 2,200,000 1,500,000
500,000
1/1/18 2,300,000
2,000,000 150,000
1/1/19 4,150,000 1/1/19 4,000,000 750,000

The above information shows the collection for the second billing amounted to:
A. P1,800,000 B. P1,750,000 C. P1,050,000 D. P750,0-00
17. The project will reflect a contract asset in the statement of financial position at what year(s)
considering the aforementioned information?
A. first year B. second year C. both years D. none
18. If you are using zero profit method, revenue recognized for the second year will amount to
A. P 2,300,000 B. 2,000,000 C. 4,150,000 D. P150,000
19. If the total profit for the project amounted to 300,000 for a contract price of P5,000,000, contract
cost for 2019 will be
A. P900,000 B. P500,000 C. P700,000 D. some other amount
20. ABC enterred into a contract to construct a building in Baguio. Contract price is based on
construction cost plus a 5% contingency plan for increase in prices + a fixed fee of P200,000. The
following are the estimated costs to be incurred for the project:
Marketing costs P 120,000 Cost of negotiating contract P 100,000
Materials to be used in construction 2,700,000 Site labor costs 1,000,000
Supervision cost 500,000 Depreciation on equipment 120,000
Depreciation of idle equipment 60,000 Rent cost of plant and
equipment not owned 140,000
40% of supervision is allocated for the Baguio site. Contract price is
A. P4,568,000 B. P4,673,000 c. P4,883,000 d. some other amount
20. IFRS 15 considers the following factors in recognizing revenue: contract with a customer,
performance obligation of an entity, transaction price and its allocation spread over the
performance obligation. Give one more missing factor.

PROBLEM SOLVING (Solution to A on the left side of worksheet, B and C on the right side of worksheet)
A. Sta Clara a construction company started on a project in 2016 with a contract price of
P6,000,000. You are given the following information regarding this project:

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 For 2016, gross profit reported was P200,000 with cost incurred of P2,200,000.
For 2017, cost incurred to date was P4,600,000 with estimated cost to complete of
P1,150,000.
In 2017, due to escalation of costs, the contract price was modified to P6,200,000.
Accounts receivable had a P400,000 balance in 2016 based on a progress billing of
P2,000,000.
In 2017 customer was billed again for P3,000,000. Accounts Receivable has been 75%
collected already based on contract price.

Questions: 1. What was the percentage of completion in 2016?

2. What was the project cost in 2016?
3. a. Give the entries in 2017 supported by a table.
b. Give a partial statement of financial position showing Accounts Receivable,
CIP and Progress Billings.
4. Give the entries in 2018 when reported project cost at its completion amounted
to P6,050,000 and the customer paid the balance of the contract.
B. Using Problem A but change the cost data in 2017: cost incurred for 2017 amounted
to P2,750,000 while estimated cost to complete was P1,237,500. The contract price was
changed to P6,200,000 only in 2018.
What would be the anticipated loss to be recognized in 2017? Give two entries in
recognizing CIP, Contract Revenue and Contract Cost.
In 2018, the project was completed with a total project cost of P6,100,000. Give the additional
entries in 2018 for the CIP. Contract Revenue and Contract Cost.
C. Daylite Electric received an order on November 2018 for reinstallation of the
electrical electrical wirings in the ER Wing of Philippine General Hospital including the
installation of a generator. The following is included in the contract:
Contract Price P12 million and assessment by Daylite considers the contract as one
performance obligation. Generator costs P4 million bought from a supplier and the other
costs that will be incurred will be P5 million for materials, labor and OH. Cost of the
generator is a significant cost based on total project cost.
Actual cost incurred is P6 million including the cost of the generator.
Required: Compute for the a) revenue and b) profit to be recognized in 2018.
Remember to exclude the generator in computing for percentage of completion. And
consider the cost of the generator as revenue and cost of goods sold.
D. Deo Construction Corp uses the percentage of completion method for this project which is worth
4,000,000:
2017 2018 2019
Cost to date 1,680,000 ? 3,600,000
Gross Profit 320,000 (120,000) ?
Questions: Using cost to cost method compute for the 1) project cost estimated in 2017 2) percentage
of completion in 2018 3) total cost incurred for the project in 2018 and the 4) gross profit in
2019. Assume that the project requires only a 20% completion .

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 THEORY:
1. Commercial substance
2.A 3.A 4. A 5. D 6. A 7. C 8. B 9. C 10.B
11.A 12.A 13. C 14. D 15. D 16.C 17.C 18.B 19.A
20. A 21. revenue recognition over time or in time
2. series of transfer, if distinct and pattern of transfer is the same, it’s a one contract price but each
transfer is considered a progress of performance and can be recognized. Revenue is over time.
Percentage of completion is not based on collection. Instalment sales generally is in point of time time not
over time.
PROBABLITY of collection is required under step model 1.
4. Both are incorrect, should be over time. Situation 1 refer to condition no 3 of recognition over time. Situation
2 as there is control it is not required that client be fully operational.
5. There are two PO, the second one should be based on its stand alone price.
7. Third statement should be based on total project cost.
6. AR cannot always be the same as CIP at all times because of the collection time.
8. First statement is wrong, anticipated loss can be recognized even before commencement of work.
13. First is over time and second is in time. Third should be based on CIP
14. First statement remove less construction cost.Third statement machine hours, labor hours, mat qty are
input measures.
16. Second billing is 1,800,000- 700,000 balance of the first billing and 750,000 balance of the second billing
17. First year 2,300,000 – 2,200,000 Second year 4,150,000-4,000,000
18. Look for the construction cost for the second year
19. 5,000,000 – 300,000= 4,700,000 – 3,800,000= 900,000
20. 2,700 + 200 +1,000 +120,000 +140= 4,160 x 1.05 = 4,368 + 200,000= 4,568,000
PROBLEM A
1. Revenue is 200 + 2,200= 2,400 / 6,000 contract price = 40% percentage of completion.
2. Project cost 2,200/.4= P5,500,000 project cost estimated as at 2016.
3. Cost incurred to date 4,600 + estimated to complete 1,150= total project cost 5,750
4,600/5,750= 80% x 6,200,000= 4,960,000 revenue in 2017
Revenue P4,960 – 4,600 cost= 360,000 profit-200=160
Thousands omitted 2017 2018
Construction In Progress 2,400 1,450
Materials, Labor, OH 2,400 1,450

AR 3,000 1,200
Progress Billings 3,000 1,200

Cash 3,050 1,550

AR (6,200 x .75)-1,600 in 2016=3,050 3,050
6,200 x .25= 1,550 1,550
Construction Cost 2,400 1,450
Construction In Progress 160 210*
Revenue (4,960-2,400 last yer) 2,560 1,240
* P6,200 – 6, 050 = total profit of 150,000- (200 + 160 previous years)= 210,000 loss
2016 Construction in Progress 2,400,000 2017 Construction in Prog 4,960,000
Progress Billings 2,000,000 Progress Billlings 5,000,000
Excess of Cost 400,000 Excess of Billings 40,000
Accts Recble P1,550,000

PROBLEM B
2,750 + 2,200= total cost to date of P4,950/ total project cost 6,187.5 (4,950+1,237.5) = 80%
If contract price is not adjusted then there is an anticipated loss of P187,500
Loss to be recognized for 2017 P387,500 ( P187,500 loss + Profit of P200,000 recognized 2016)
Revenue 2,362,500
Cost 2,750,000
Loss 387,500

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Entries: Construction in Progress 2,750
Mat, Labor, OH 2,750
Construction Cost 2,750
Revenue 2,362.5
Construction in Progress 387.5

CIP 2,400 +2,750-387.5= P4,762.5- PB of P5,000= Excess Billing P237.5

2018 Actual Total Project Cost of P6,100 -2,200-2,750=1,150 for 2018

6,200-6,100= Total profit of P100-187.5= 287.5
Revenue (6,200-2,400-2,362.5) = 1,437.5

Entries: Construction in Progress 1,150

Mat, Labor , OH 1,150

Construction Cost 1,150

CIP 287.5
Revenue 1,437.5

C. Actual Cost 2,000,000 / Total other cost 5,000,000= 40%

Transaction Price 12,000,000 – 4,000,000 for generator= 8,000 x .4= 3,200,000
Cost without generator 2,000,000
Profit without generator 1,200,000

Total Revenue P7,200,000 (include generator) - Total Cost 6,000,000 (include generator)
Total Profit P1,200,000
D.
2017 2018 2019 Total
Revenue ?2,000,000 4,000,000
Cost 1,680,000 3,600,000
Profit 320,000 (120,000) ? 200,000 400,000

For 2017 if cost to date is 1,680,000, then revenue is 2,000/4,000= 50% completion
1) Project cost estimated is 1,680/.5= P3,360,000
4) Gross profit in 2019 P200,000

2017 2018 2019

Current 1,680,000 ?
Previous 1,680,000
Total to date 1,680,000 3,600,000
Estimated 1,680,000
Total Cost 3,360,000 3,600,000

To date Previous Current

Revenue 2,000,000 2,000,000
Cost 1,680,000 1,680,000
Profit 320,000 320,000

Revenue
Cost
Profit 200,000 320,000 (120,000)

Revenue 4,000,000
Cost 360,000
Profit 400,000 200,000 200,000