201.13 Accounting For Construction Contracts (IAS-11)

Special Class note for
CMA Professional Level –II

201-Advanced Financial Accounting-I
CMA
Professional Level –II
Accounting for Construction Contracts (IAS-11)
Special 201.13 Accounting Objectives; scope; definitions;
Class- for Construction combining and segmenting construction contracts;
10 Contracts (IAS-11) contract revenue; contract costs;
recognition of contract revenue and expenses;
recognition of expected losses;
changes in estimates;
disclosure of accounting policies;
accounting for contract.
IAS- 11: Construction Contracts
Objectives: Scope: Definitions:
This Standard deals with the accounting treatment The Construction Contract:
of revenue and costs related to construction requirements The contract which is entered into, for
contracts. As normally in the construction industry of this the construction of an individual asset
the duration of projects spans beyond one year and Standard are (house or an Office building) or a
project work usually takes more than one applicable in group of assets that are inter-
accounting year to get complete. Ultimately, it the financial dependent with respect to their
raises the issue for the recognition of revenue and statements of design, function or operational use
costs related to construction contract in the Contractors (airport and runway).
relevant period in which construction work was to account for The construction contracts
carried out. This Standard provides guidance for construction include:
the recognition of contract revenue and related contracts. (a) Contracts for the construction of
costs in the statement of Profit & Loss, using the the individual asset or group of assets.
recognition criteria given in the Framework for (b) Contracts involving destruction or
Financial Reporting. restoration of old assets.
Types of Contract:
1) Fixed Price Contract: A contract in which the contractor & customer decides a fixed sum/price per unit of output.
2) Cost Plus Contract: A contract in which the contractor agrees to receive all the allowable cost of the contract plus
a certain decided percentage of the allowable cost as profit.
Combining and Segmenting Segmenting: For the contract involving group of assets, the each asset shall be
Construction Contracts: This treated as a separate contract if:
standard applies to each (a) Each asset was subject to a separate proposals by contractor and
contract on individual basis. (b) The terms of each asset was negotiated separately and both the contractor
However, sometimes, entity and customer have option to accept or reject the contract relating to each
needs to ascertain that asset in the group of assets
whether a contract for the (c) Each asset has identifiable revenue and cost on individual basis.
construction of group of
assets will be treated as a Combining: For the contract involving group of assets, the contract as whole will
single contract or each asset be treated as a single contract if:
in group of assets will be (a) The contractor and customer both have a single contract for the construction
treated as a separate of group of asset
contract; in such (b) The assets in the group of assets are interdependent in terms of their design
circumstances the entity or use, and seems to be the components of a single contract in commercial
should apply the following: substance
(c) The parts of the whole contract will be completed in a continuous manner.
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Md.Monowar Hossain FCMA,FCPA,ACS,ACA Thursday, July 03, 2014
Audit Consultant (General Manager),
Rupali Bank Ltd.
• Amendment into Contract:

Normally the construction contract includes an amendment clause for both contractor and customer. If the
customer chooses to amend the original contract in order to include the construction of an additional asset. In such
situation the additional asset will be taken as a separate contract if:
(a) The additional asset is materially different in terms of its design or function from the asset
or group of assets under the original contract;
(b) The contract price for the additional asset is subject to separate negotiation irrespective of
the original contract.
Contract Revenue Contract Costs
Contract Revenue may include the The cost of the contract includes the following:
following components: (1) The cost directly related to the contract which includes:
(1) Contract price decided as per (a) Direct material and labor cost
the terms of the contract and (b) Supervision charges
(2) Any revenue in respect of (c) Depreciation expense in respect of plant and equipment used in
variations in the original contract construction;
work required by customer, if it is (d) Mobilization and demobilization costs
probable: (e) Hiring charges for temporary plant and equipment;
(a) That variation and related (f) Designing and technical assistance charges related to contract;
amount of revenue will be (g) Third party claims
approved by the customer; and (2) Common cost attributable to contract on reasonable and consistent
(b) Revenue related to variation basis which includes:
is reliably measurable. (a) Insurance Cost;
(3) Any revenue in the form of (b) General and administrative overheads
Incentive or efficiency payments if (c) Salary Expense of employees working on multiple contracts
it is probable: (3) Other costs which is specifically related to the contract as per the
(a) That the contractor will contractual terms.
meet the specified performance Note:
standards; and The costs that are incurred in securing the contract are also the part of the
(b) Revenue in respect of the cost of the contract if:
incentive payment is reliably (a) It is identifiable, and reliably measurable;
measurable. (b) the contract is obtained.
Recognition of Contract Revenue and Cost
The recognition of contract revenue and cost depends upon the outcome of the contract. Therefore, the entity shall
apply the guidance as follows if:
1) Outcome of the contract is reliably measurable: The contract revenue and costs shall be recognized in statement
of profit & loss, on the basis of “stage of completion” of the contract, measured at the end of the accounting period.
i) Determination of the outcome of the contract : The outcome of the contract will deemed to be reliably
measurable if:
• For a Fixed Price Contract: For a fixed price contract, the outcome will deemed to be reliably measurable
If it satisfies the following criteria:
(a) Revenue of the contract is reliably measurable;
(b) Economic benefits related to the contract are probable to flow to the entity;
(c) Costs incurred and to be incurred is reliably measurable;
(d) The stage of completion of the contract is measured reliably at the end of accounting period
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Rupali Bank Ltd.
• For a Cost Plus Contract: For a cost plus contract, the outcome will deemed to be reliably measurable
If it satisfies the following criteria:
(a) Economic benefits related to the contract are probable to flow to the entity;
(b) Costs incurred and to be incurred is reliably measurable
ii) Stage of Completion:

The entity will measure the stage of completion of a contract, at the end of reporting period using one of the
following methods:
• Cost to Cost Basis: Cost to date / (Cost to date + Future Cost) x 100
• Physical Proportion or Work Certified Method: Work Certified to date / Total Contract Price x100
• Survey Method: Stage of Completion will be assessed by qualified professional
2) Outcome of the contract is not reliably measurable: The entity shall apply the following:
(a) The contract revenue will be recognized only upto the extent of costs incurred on the contract to date, if it is
recoverable. Hence there will be no profit no loss.
(b) Contract costs will be recorded as expense in the related reporting period.
Note:
a) If there is uncertainty for the recovery of the amount which has previously been recorded as contract revenue in
statement of profit or loss, then the such irrecoverable amount will be recorded as an expense in statement of profit
or loss, instead of adjustment to recognized contract revenue
b) If in a particular situation, it is probable that entity will not be able, even to recover its allowable cost incurred on
the contract, then such cost should be recognized in statement of profit or loss in the relevant period
This may be the case in the following situations:
• Contracts which are subject to legal proceedings
• Inability of the contractor to meet its performance obligation;
• where the customer is in financial crises
Recognition of Expected Losses for Onerous Contract

If for a particular construction contract, the cost of performance of the contract exceeds the contract revenue, it will
be treated as onerous contract. In such circumstance entity is required to recognize the expected loss in statement
of profit or loss, in the period in which contract becomes onerous.
1) This Standard requires the following disclosures in respect of construction contract:

(a) Contract revenue recognized in the current period;
(b) the approach used by the entity in determination of revenue recorded in the current period;
(c) the approach used by the entity in determination of the stage of completion of contracts at the
end of reporting period
2) The disclosures shall also include the following:

(a) Cost incurred to date and profits recognized to date;
Disclosure (b) Any advances received from customer to date
3) The entity will present the following in the statement of financial position:
(a) Amount due from customer related to contract as an asset; and
(b) Amount due to customers related to contract as a liability.
4) The disclosure shall also include any contingent liabilities or assets as per requirements of IAS
37 in respect of any contingent liabilities or asset which may arise from events as penalties or
expected losses.
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Rupali Bank Ltd.
Workings for Financial Statement (under IAS-11):
(W1) Stage of Completion: As per method mentioned in question
(W2) Estimated Total Profit/ (Loss) on the Contract:

Total Contract Revenue x
Total Contract Cost (x)
Estimated Total Profit x/(x)
(W3) Profit to date:

Revenue to date (Total Revenue x Stage of Comp.) x
Cost to date (Balancing Fig) (x)
Profit to date (Total Profit x Stage of Comp,) x
Less: Profit already recognize in previous year (x)
Profit for the year x
(W4) Statement of Profit or Loss:

Revenue x
Cost (x)
Profit x
Less: Rectification Cost of Error by Contractor (x)
Less: Provision for Onerous Contract (x)
Profit for the year x
(W5) Statement of financial position:

Cost to date (As given in quest.) x
Profit / (loss) to date x/(x)
Less: Progress Billings (x)
Due from / (to) x/(x)
Problem No.33 [Contracts for which outcome is reliably measurable]
FYR LTD is an entity engages in construction business & prepares its financial records to 31 December every year. In
the current year ended 31 December, 2013 the company started two contracts expected to take more than one
year. Following are the extracts relating to each contract at 31 December 2013:
Contract 1 2
$'000 $'000
Total contract price 11,000 2,400
Estimated total cost of contract at 01 Jan-2013 8,000 1,800
Estimated total cost at 31 Dec 2013 8,000 2,500
Agreed work completed at 31 Dec 2013 6,600 1,680
Progress billings invoiced 31 Dec 2013 6,000 1,760
Costs incurred to 31 December 2013 7,800 1,440
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Rupali Bank Ltd.
The entity calculates the percentage of completion as the agreed value of work completed to date, to the total
contract price.
Required: Prepare extracts of financial statements for the year ended 31 December 2013
Solution of problem no.33 [Contracts for which outcome is reliably measurable]
Step 1: Determination of Outcome of the Contract

As the outcome of the contract is reliably measurable therefore, the contract revenue & cost will be recognized on
the basis of stage of completion
Step 2: Calculation of Stage of Completion (Using Work Certified Method)
Contract 1 2
$’000 $’000
Total Contract Revenue 11,000 2,400
Work Certified at 31 Dec 2013 6,600 1,680
Percentage of Completion x 100 (6,600 / 11,000)x100 = 60% (1,680 / 2,400)x100 = 70%
Step 3: Estimated Total Profit/Loss on the Contract

$’000 $’000
Total Contract Revenue 11,000 2,400
Total Contract Cost (8,000) (2,500)
Estimated Total Profit 3,000 (100)
Step 4: Profit to date

$’000 $’000
Revenue to date (11,000 x 60) / (2,400 x 70%) 6,600 1,680
Cost to date (Balancing Fig) (4,800) (1,750)
Profit to date (3000 x 60%) / (100 x 70%) 1,800 (70)
Less: Profit already recognize in previous year - -
Profit/ (Loss) for the year 1,800 (70)
Step 5: Statement of Profit or Loss

$’000 $’000
Revenue 6,600 1,680
Cost (4,800) (1,750)
Profit/ (Loss) 1,800 (70)
Less: Rectification Cost of Error by Contractor - -
Less: Provision for Onerous Cont. (100-30) Remaining loss - (30)
Profit/ (Loss) for the year 1,800 (100)
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Rupali Bank Ltd.
Step 6: Statement of Financial Position
$’000 $’000
Cost to date 7,800 1,440
Profit / (loss) to date 1,800 (100)
Less: Progress Billings (6,000) (1,760)
Due from / (to) 3,600 (420)
Problem No.34 [Contracts for which outcome is not reliably measurable]
Yeasmine LTD is an entity engages in construction business. It started a contract for the construction of a school
building for one of its client, spanning 2 years. The price of the contract was agreed to be $4 million.
The contract was started on 01, January 2013 but unfortunately construction material prices started increasing
materially from last few months after the start of the contract, due to unforeseen reason.
Yeasmine LTD has intimated the customer for the increase in material price and requested for compensation of
additional costs, but yet, the entity is unsure about the compensation of the additional costs.
Therefore, outcome of the contract is not reliably measurable at the end of the first accounting period 31-12-2013,
as to whether the contract will be profitable or not.
Following extracts are available from the records of Yeasmine LTD related to this contract at the first year ended 31-
12-2013:
$’000
Contract Price 4,000
Cost incurred to Date 2,400
Cost likely to be recoverable 2,000
Progress billings to customer 1,800
Required: Prepare extracts of financial statements for the year ended 31-12-2013.
Solution of problem no.34 [Contracts for which outcome is not reliably measurable]
As the outcome of the contract is not reliably measurable therefore, the contract revenue will be recognized only
upto the extent of costs incurred on the contract to date, to the extent it is recoverable.
Yeasmine LTD
Statement of Profit or Loss
$’000
Revenue to date (up to extent, which is recoverable) 2,000
Cost to date (2,400)
Loss to date (400)
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Rupali Bank Ltd.
Yeasmine LTD
Statement of Financial Position
Cost to date 2,400
Less: Loss to date (400)
Less: Progress Billings (1,800)
Due from 200
Problem No.35 [Contracts]

On 1 st January 2013, FYR Construction Co Ltd has signed a fixed price contract of € 42 million to build a bridge over
a period of two years. At 31st December 2013, the following information are as follows:-
€ million
Cost of construction material ………………………………………… 10
Site labor cost ……………………………………………………………….. 9
Depreciation of plant & machinery used ……………………….. 2
Administrative costs ……………………………………………………… 2
Estimated cost to complete …………………………………………… 14
Progress billing ……………………………………………………………… 9
Required:
(a) Calculate the percentage of completion
(b) Amounts to be disclosed in the Income statement
(c) Amounts to be disclosed in the Balance sheet.
Solution of problem no.35 [Contracts]
Cost to date
Cost to date
Cost Incurred to date € million
Cost of construction material 10
Site labor cost 9
Depreciation of plant & machinery used 2
Cost to date 21
Cost to complete 14
Total estimated cost 35
a. Percentage of completion
= Cost to date/ Total estimated cost(above) x 100%
= 21/35 x 100 = 60%
(b) Presentation in Income Statement

Income Statement for Year ended 31st December 2007
€ million
Revenue ( €42m x 60%) 25.2
Less: Costs (60% x Rm350m) 21.0
Profit 4.2
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Rupali Bank Ltd.
(c) Presentation in Balance Sheet

Balance Sheet as at 31st December 2013
€ million
Current Assets €’m
Amount due from customer 16.2
Workings: €
Contract costs incurred to date 21
Recognized profits (less recognized losses) 4.2
25.2
Progress billing (9)
Due from customer 16.2
Problem No.36 [Journal entries—percentage-of-completion]
A Construction Company was awarded a contract to construct an interchange at the junction of U.S. 94 and
Highway 30 at a total contract price of $8,000,000. The estimated total costs to complete the project were
$6,000,000.
Instructions
(a) Make the entry to record construction costs of $3,600,000, on construction in process to date.
(b) Make the entry to record progress billings of $2,000,000.
(c) Make the entry to recognize the profit that can be recognized to date, on a percentage-of-completion basis.
Solution of problem no.36 [Journal entries—percentage-of-completion]
(a) Construction in Process ................................................................................. 3,600,000

Materials, Cash, Payables, Etc......................................................... 3,600,000
(b) Accounts Receivable...................................................................................... 2,000,000

Billings on Construction in Process .................................................. 2,000,000
(c) Construction Expenses .................................................................................. 3,600,000

Construction in Process (60% complete) ....................................................... 1,200,000
Revenue from Long-Term Contracts ................................................ 4,800,000
Problem No.37 [Percentage-of-completion method.]
A Construction Co. contracted to build a bridge for $5,000,000. Construction began in 2010 and was completed in
2011. Data relating to the construction are:
2010 2011
Costs incurred $1,650,000 $1,375,000
Estimated costs to complete 1,350,000 —
The Company uses the percentage-of-completion method.
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Rupali Bank Ltd.
Instructions
(a) How much revenue should be reported for 2010? Show your computation.
(b) Make the entry to record progress billings of $1,650,000 during 2010.
(c) Make the entry to record the revenue and gross profit for 2010.
(d) How much gross profit should be reported for 2011? Show your computation.
Solution of problem no.37 [Percentage-of-completion method.]
(a) $1,650,000
————— × $5,000,000 = $2,750,000
$3,000,000
(b) Accounts Receivable...................................................................................... 1,650,000

Billings on Construction in Process ................................................. 1,650,000
(c) Construction Expenses .................................................................................. 1,650,000

Construction in Process ................................................................................. 1,100,000
(d) Revenue $5,000,000

Costs 3,025,000
Total gross profit 1,975,000
Recognized in 2010 (1,100,000)
Recognized in 2011 $ 875,000
Or
Total revenue $5,000,000
Recognized in 2010 (2,750,000)
Recognized in 2011 2,250,000
Costs in 2011 (1,375,000)
Gross profit in 2011 $ 875,000
Problem No.38 [Percentage-of-completion method.]
Builders contracted to build a high-rise for $14,000,000. Construction began in 2010 and is expected to be
completed in 2013. Data for 2010 and 2011 are:
2010 2011
Costs incurred to date $1,800,000 $5,200,000
Estimated costs to complete 7,200,000 4,800,000
Builders uses the percentage-of-completion method.
Instructions
(a) How much gross profit should be reported for 2010? Show your computation.
(b) How much gross profit should be reported for 2011?
(c) Make the journal entry to record the revenue and gross profit for 2011.
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Rupali Bank Ltd.
Solution of problem no.38 [Percentage-of-completion method.]
(a) $1,800,000
————— × $5,000,000 = $1,000,000
$9,000,000
(b) $5,200,000
—————— × $4,000,000 = $2,080,000
$10,000,000
Less 2010 gross profit 1,000,000
Gross profit in 2011 $1,080,000
(c) Construction in Process ................................................................................. 1,080,000

Construction Expenses .................................................................................. 3,400,000
Problem No.39 [Installment sales.]
A Co. had installment sales of $1,000,000 and cost of installment sales of $700,000 in 2010. A 2010 sale resulted in a
default in 2012, at which time the balance of the installment receivable was $30,000. The repossessed merchandise
had a fair value of $15,000.
Instructions
(a) Calculate the rate of gross profit on 2010 installment sales.
(b) Make the entry to record the repossession.
Solution of problem no.39 [Installment sales.]
(a) $300,000 ÷ $1,000,000 = 30%
(b) Repossessed Merchandise .............................................................................. 15,000

Deferred Gross Profit, 2010 (.30 × $30,000) ................................................... 9,000
Loss on Repossession ...................................................................................... 6,000
Installment Accounts Receivable, 2010 ................................................. 30,000
A Furniture Company concluded its first year of operations in which it made sales of $800,000, all on installment.
Collections during the year from down payments and installments totaled $300,000. Purchases for the year totaled
$400,000; the cost of merchandise on hand at the end of the year was $80,000.
Instructions
Using the installment-sales method, make summary entries to record:
(a) the installment sales and cash collections;
(b) the cost of installment sales;
(c) the unrealized gross profit;
(d) the realized gross profit.
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Rupali Bank Ltd.
(a) Installment Accounts Receivable .................................................................. 800,000

Installment Sales ............................................................................. 800,000
Cash............................................................................................................... 300,000
Installment Accounts Receivable ..................................................... 300,000
(b) Cost of Installment Sales ($400,000 – $80,000)............................................ 320,000

Inventory ......................................................................................... 320,000
(c) Installment Sales ........................................................................................... 800,000

Cost of Installment Sales ................................................................. 320,000
Deferred Gross Profit (60%)............................................................. 480,000
(d) Deferred Gross Profit (60% × $300,000) ....................................................... 180,000

Realized Gross Profit on Installment Sales ...................................... 180,000
A Company sells office equipment. On January 1, 2011, Finley entered into an installment sale contract with Miller
Company for a six-year period expiring January 1, 2017. Equal annual payments under the installment sale are
$936,000 and are due on January 1. The first payment was made on January 1, 2011.
Additional information is as follows:
1. The cash selling price of the equipment, i.e., the amount that would be realized on an outright sale, is
$4,584,000.
2. The cost of sales relating to the equipment is $3,825,000.
3. The finance charges relating to the installment period are $1,032,000 based on a stated interest rate
of 9% which is appropriate. For tax purposes, Finley appropriately uses the accrual basis for
recording finance charges.
4. Circumstances are such that the collection of the installment sale is reasonably assured.
5. The installment sale qualified for the installment method of reporting for tax purposes.
6. Assume that the income tax rate is 30%.
Instructions
What income (loss) before income taxes should the Company appropriately record as a result of this transaction for
the year ended December 31, 2011? Show supporting computations in good form.
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Rupali Bank Ltd.
(Note: For financial accounting purposes, the installment-sales method is not used, and the full gross profit is
recognized in the year of sale, because collection of the receivable is reasonably assured.)
A Company
Computation of Income Before Income Taxes
On Installment Sale Contract
For the Year Ended December 31, 2011
Sales $4,584,000
Cost of Sales 3,825,000
Gross Profit 759,000
Interest Revenue (Schedule I) 328,320
Income before Income Taxes $1,087,320
Schedule I
Computation of Interest Revenue on
Installment Sale Contract
Cash selling price (sales) $4,584,000
Payment made on January 1, 2011 936,000
Balance outstanding at 12/31/11 3,648,000
Interest rate 9%
Interest Revenue $ 328,320
Problem No.42 [Franchises.]
FYR Inn charges an initial fee of $800,000 for a franchise, with $160,000 paid when the agreement is signed and the
balance in four annual payments. The present value of the annual payments, discounted at 10%, is $507,200. The
franchisee has the right to purchase $60,000 of kitchen equipment and supplies for $50,000. An additional part of
the initial fee is for advertising to be provided by Pasta Inn during the next five years. The value of the advertising is
$1,000 a month. Collectibility of the payments is reasonably assured and Pasta Inn has performed all the initial
services required by the contract.
Instructions
Prepare the entry to record the initial franchise fee. Show supporting computations in good form.
Solution of problem no.42 [Franchises.]
Total fee $800,000

Discount $ 640,000
(507,200) (132,800)
Bargain purchase (10,000)
Advertising ($1,000 × 60) (60,000)
$597,200
Cash ........................................................................................................... 160,000

Notes Receivable ....................................................................................... 640,000
Discount on Notes Receivable ..................................................... 132,800
Revenue from Franchise Fees ...................................................... 597,200
Unearned Franchise Fees ............................................................ 70,000
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Rupali Bank Ltd.
Problem No.43 [Long-term construction project accounting]
A Construction specializes in the construction of commercial and industrial buildings. The contractor is experienced
in bidding long-term construction projects of this type, with the typical project lasting fifteen to twenty-four months.
The contractor uses the percentage-of-completion method of revenue recognition since, given the characteristics of
the contractor's business and contracts, it is the most appropriate method. Progress toward completion is measured
on a cost to cost basis. Dobson began work on a lump-sum contract at the beginning of 2011. As bid, the statistics
were as follows:
Lump-sum price (contract price) $4,000,000
Estimated costs
Labor $ 850,000
Materials and subcontractor 1,750,000
Indirect costs 400,000 3,000,000
$1,000,000
At the end of the first year, the following was the status of the contract:
Billings to date $2,230,000
Costs incurred to date
Labor $ 464,000
Materials and subcontractor 1,098,000
Indirect costs 193,000 1,755,000
Latest forecast total cost 3,000,000
It should be noted that included in the above costs incurred to date were standard electrical and mechanical
materials stored on the job site, but not yet installed, costing $105,000. These costs should not be considered in the
costs incurred to date.
Instructions
(a) Compute the percentage of completion on the contract at the end of 2011.
(b) Indicate the amount of gross profit that would be reported on this contract at the end of 2011.
(c) Make the journal entry to record the income (loss) for 2011 on Dobson's books.
(d) Indicate the account(s) and the amount(s) that would be shown on the balance sheet of Dobson Construction
at the end of 2011 related to its construction accounts. Also indicate where these items would be classified on
the balance sheet. Billings collected during the year amounted to $1,980,000.
(e) Assume the latest forecast on total costs at the end of 2011 was $4,050,000. How much income (loss) would
Dobson report for the year 2011?
Solution of problem no.43 [Long-term construction project accounting]

(a) Costs to date $1,755,000
Less materials on job site (105,000)
$1,650,000
Costs Incurred to Date

—————————— = Percentage of Completion
Total Estimated Costs
$1,650,000
————— = 55%
$3,000,000
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(b) 55% × $4,000,000 = $2,200,000

Costs incurred 1,650,000
Gross profit $ 550,000
(c) Construction Expense .................................................................................... 1,650,000

Construction in Process ................................................................................. 550,000
Revenue from Long-Term Project .................................................... 2,200,000
(d) Current Assets

Accounts receivable $250,000 ($2,230,000 – $1,980,000)
Current Liability
Billings in excess of contract costs and
recognized profit $30,000 ($2,230,000 – $2,200,000)
(e) Total loss reported in 2011

Contract price $4,000,000
Estimated cost to complete 4,050,000
Amount of loss to be reported $ (50,000)
Problem No.44 [Accounting for long-term construction contracts]
The board of directors of Ogle Construction Company is meeting to choose between the completed-contract method
and the percentage-of-completion method of accounting for long-term contracts in the company's financial
statements. You have been engaged to assist Ogle's controller in the preparation of a presentation to be given at
the board meeting. The controller provides you with the following information:
1. Ogle commenced doing business on January 1, 2011.
2. Construction activities for the year ended December 31, 2011, were as follows:
Total Contract Billings Through Cash Collections

Project Price 12/31/11 Through 12/31/11
A $ 515,000 $ 340,000 $ 310,000
B 690,000 210,000 210,000
C 475,000 475,000 390,000
D 200,000 100,000 65,000
E 480,000 400,000 400,000
$2,360,000 $1,525,000 $1,375,000
Contract Costs Estimated

Incurred Through Additional Costs to
Project 12/31/11 Complete Contracts
A $ 424,000 $101,000
B 195,000 455,000
C 350,000 -0-
D 123,000 97,000
E 320,000 80,000
$1,412,000 $733,000
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3. Each contract is with a different customer.

4. Any work remaining to be done on the contracts is expected to be completed in 2012.
Instructions
(a) Prepare a schedule by project, computing the amount of income (or loss) before selling, general, and
administrative expenses for the year ended December 31, 2011, which would be reported under:
(1) The completed-contract method.
(2) The percentage-of-completion method (based on estimated costs).
(b) Prepare the general journal entry(ies) to record revenue and gross profit on project B (second project) for
2011, assuming that the percentage-of-completion method is used.
(c) Indicate the balances that would appear in the balance sheet at December 31, 2011 for the following accounts
for Project D (fourth project), assuming that the percentage-of-completion method is used.
Accounts Receivable
Billings on Construction in Process
Construction in Process
(d) How would the balances in the accounts discussed in part (c) change (if at all) for Project D (fourth project), if
the completed-contract method is used?
Solution of problem no.44 [Accounting for long-term construction contracts]
(a) (1) and (2)

Projects A B C D E
Contract price $515,000 $690,000 $475,000 $200,000 $480,000
Contract costs incurred 424,000 195,000 350,000 123,000 320,000
Additional costs
to complete 101,000 455,000 -0- 97,000 80,000
Total cost 525,000 650,000 350,000 220,000 400,000
Total gross profit
or (loss) $ (10,000) $ 40,000 $125,000 $ (20,000) $ 80,000
The amount reported as income (loss) under the completed-contract method for 2011 is:
Project A $(10,000)
B -0-
C 125,000
D (20,000)
E -0-
$ 95,000
The amount reported as income (loss) under the percentage-of-completion method for 2011 is:
Project A $(10,000)
B 12,000 $40,000 × ($195,000 ÷ $650,000)
C 125,000
D (20,000)
E 64,000 $80,000 × ($320,000 ÷ $400,000)
$171,000
143
Rupali Bank Ltd.
(b) Construction in Process ................................................................................. 12,000

Construction Expenses .................................................................................. 195,000
Revenue from Long-term Contracts ................................................ 207,000
(c) Billings $100,000

Cash collections 65,000
Accounts receivable $ 35,000
Billings on Construction in Process 100,000
Costs incurred $123,000

Loss reported (20,000)
Construction in process $103,000
(d) The account balances would be the same.
Problem No.45 [Long-term contract accounting (completed-contract]
A Construction, Inc. experienced the following construction activity in 2011, the first year of operations.
Cash Cost Estimated
Total BillingsCollections Incurred Additional
Contract through through through Costs to
Contract Price 12/31/11 12/31/11 12/31/11 Complete
X $260,000 $165,000 $155,000 $182,000 $ 63,000
Y 330,000 115,000 115,000 100,000 247,000
Z 233,000 233,000 198,000 158,000 -0-
$823,000 $513,000 $468,000 $440,000 $310,000
Each of the above contracts is with a different customer, and any work remaining at December 31, 2011 is expected
to be completed in 2012.
Instructions
Prepare a partial income statement and a partial balance sheet to indicate how the above contract information
would be reported. Evans uses the completed-contract method.
Solution of problem no.45 [Long-term contract accounting (completed-contract]
A Construction, Inc.
Income Statement
For the Year 2011
Revenue from long-term contracts (contract Z) $233,000
Cost of construction (contract Z) 158,000
Gross profit $ 75,000
Provision for loss (contract Y)* 17,000
*Contract costs through 12/31/11 $100,000
Estimated costs to complete 247,000
Total estimated costs 347,000
Total contract price 330,000
Loss recognized in 2011 $ 17,000
144
Rupali Bank Ltd.
A Construction, Inc.
Balance Sheet
As of 12/31/11
Current assets:
Accounts receivable ($513,000 – $468,000) $ 45,000
Inventories
Construction in process (contract X) $182,000
Less: Billings 165,000
Unbilled contract costs 17,000
Current liabilities:
Billings ($115,000) in excess of contract costs ($100,000) 15,000
Estimated loss from long-term contracts 17,000
Remember:
Homework:
25. Question No.3 of CMA Exam: August-2013
26. Question No.5 of CMA Exam: April-2013
145
Rupali Bank Ltd.

201.13 Accounting For Construction Contracts (IAS-11)

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Special Class note for

CMA Professional Level –II

• Amendment into Contract:

Recognition of Contract Revenue and Cost

ii) Stage of Completion:

Recognition of Expected Losses for Onerous Contract

1) This Standard requires the following disclosures in respect of construction contract:

2) The disclosures shall also include the following:

Workings for Financial Statement (under IAS-11):

(W1) Stage of Completion: As per method mentioned in question

(W2) Estimated Total Profit/ (Loss) on the Contract:

(W3) Profit to date:

(W4) Statement of Profit or Loss:

(W5) Statement of financial position:

Problem No.33 [Contracts for which outcome is reliably measurable]

Solution of problem no.33 [Contracts for which outcome is reliably measurable]

Step 1: Determination of Outcome of the Contract

Step 2: Calculation of Stage of Completion (Using Work Certified Method)

Step 3: Estimated Total Profit/Loss on the Contract

Step 4: Profit to date

Step 5: Statement of Profit or Loss

Step 6: Statement of Financial Position

Problem No.34 [Contracts for which outcome is not reliably measurable]

Problem No.35 [Contracts]

Solution of problem no.35 [Contracts]

(b) Presentation in Income Statement

(c) Presentation in Balance Sheet

Problem No.36 [Journal entries—percentage-of-completion]

Solution of problem no.36 [Journal entries—percentage-of-completion]

(a) Construction in Process ................................................................................. 3,600,000

(b) Accounts Receivable...................................................................................... 2,000,000

(c) Construction Expenses .................................................................................. 3,600,000

Problem No.37 [Percentage-of-completion method.]

The Company uses the percentage-of-completion method.

Solution of problem no.37 [Percentage-of-completion method.]

(b) Accounts Receivable...................................................................................... 1,650,000

(c) Construction Expenses .................................................................................. 1,650,000

(d) Revenue $5,000,000

Problem No.38 [Percentage-of-completion method.]

Builders uses the percentage-of-completion method.

Solution of problem no.38 [Percentage-of-completion method.]

(c) Construction in Process ................................................................................. 1,080,000

Problem No.39 [Installment sales.]

Solution of problem no.39 [Installment sales.]

(a) $300,000 ÷ $1,000,000 = 30%

(b) Repossessed Merchandise .............................................................................. 15,000

Problem No.40 [Installment sales.]

Solution of problem no.40 [Installment sales.]

(a) Installment Accounts Receivable .................................................................. 800,000

(b) Cost of Installment Sales ($400,000 – $80,000)............................................ 320,000

(c) Installment Sales ........................................................................................... 800,000

(d) Deferred Gross Profit (60% × $300,000) ....................................................... 180,000

Problem No.41 [Installment sales.]

Solution of problem no.41 [Installment sales.]

Problem No.42 [Franchises.]

Solution of problem no.42 [Franchises.]

Total fee $800,000