LONG-TERM CONSTRUCTION CONTRACTS

1) It 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
a. Fixed price contract
b. Cost plus contract
c. Variable contract
d. Mixed contract

2) Aside from the initial amount of revenue agreed in the long-term construction contract, additional
revenues may be recognized by the contractor (1) to the extent that it is probable that they will
result in revenue and (2) they are capable of being reliable measured. Which of the following will
not be considered as additional contract revenue by a contractor?
a. Variation in contract work as instructed by the customer regarding the scope of work to be
performed.
b. Claim that the contractor may seek to collect from the customer for customer caused delays or
errors in specification or design.
c. Incentive payments to be paid to the contractor if specified performance standards are met or
exceeded or for early completion of the contract
d. Gain on sale of scrap materials from construction

3) The following costs shall be capitalized as part of construction in progress or contract costs, except
a. Costs of hiring and moving plant and equipment to and from the contract site
b. Systematically, rationally and consistently allocated construction overheads and borrowing costs
c. Costs that are specifically chargeable to the customer under the terms of the contract my
include some general administration costs and development costs for which reimbursement is
specified in the terms of the contract
d. General and research and development costs for which reimbursement is not specified in the
contract

4) Which of the following accounting changes shall be treated retrospectively instead of prospectively
by the long-term construction contractor?
a. Change in the construction revenue
b. Change in the estimated costs to complete the contract
c. Change in the estimate of the outcome of the contract
d. Change from percentage of completion to cost recovery method or vice versa

5) The percentage of completion method of accounting for long-term construction contracts is an

exception to the
a. Matching principle
b. Going concern assumption
c. Historical cost principle
d. Revenue recognition principle
PROBLEM 1

AIRA Co. entered into a fixed price contract to build a tower block. The initial amount of revenue agreed
is P440m. At the beginning of the contract on January 1, 2016, the initial estimate of the contract costs
was P400m. At the end of 2016, the estimate of the total costs rose to P404m.

During 2017, AIRA Co. agreed to a variation which increases expected revenue from the contract by
P10m and incurs additional costs of P6m. At the end of 2017, there are materials stored on site for use
during the following period which cost P5m.

It has been decided to determine the stage of completion of the contract by calculating the proportion
of contract costs incurred for work to date compared to the latest estimated total contract costs. The
contract costs incurred at the end of each year were as follows:

2016: P105.04m,

2017: P274.7m (including materials in store)

2018: P410m.

Required:

2016 2017 2018

Revenue 6) 114,400 9) 181,612 12) 153,988
Cost 7) 105,040 10) 164,660 13) 140,300
Gross Profit 8) 9,360 11) 16,952 14) 13,688

PROBLEM 2
ABIGAIL Co. has two contracts in progress, the details of which are as follows.
RIALYN MARY GRACE
P'000 P'000
Total contract price 300 300
Costs incurred to date 90 150
Estimated costs to completion 135 225
Progress payments invoiced and received 116 116
Required

Show extracts from the statement of profit or loss and other comprehensive income and the
statement of financial position for each contract, assuming they are both:
(a) 40% complete
RIALYN MARY GRACE
Revenue 15) 19)
Cost 16) 20)
Gross profit 17) 30,000 21) (75,00)
Contract asset/liability 18) (4,000) 22) (41,000)
(b) 36% complete
RIALYN MARY GRACE
Revenue 23) 27)
Cost 24) 28)
Gross profit 25) 27,000 29) (75,000)
Contract asset/liability 26) 1,000 30) (41,000)

PROBLEM 3

The main business of RHENA LYN Co. is construction contracts. At the end of September 2018 there is an
uncompleted contract on the books, details of which are as follows.

Date commenced 4.1.2017

Expected completed date 12.23.2018

RHENA LYN Co. calculates the stage of completion of contracts using the value of work certified as a
proportion of total contract value.

Php
Final contract price 290,000
Costs to 9.30.2018 210,450
Value of work certified to 9.30.2018 230,000
Progress billings to 9.30.2018 210,000
Cash received to 9.30.2018 194,000
Estimated costs to completion at 9.30.2018 20,600

9.30.2018
Revenue 31) 257,185
Cost 32) 210,450
Gross Profit 33) 46,753
CIP 34) 257,203
Contract asset/liability 35) 47,203

PROBLEM 4

On January 1, 2018, RONNA MIE Company, a real estate company entered into a contract to construct a
building on a piece of land it has acquired and, when construction is complete, to deliver the property to
the customer. The following information pertains to the contract: Total cost of land – P2M; estimated
total cost of construction – P10M; estimated total cost of contract – P12M; agreed purchase price is
P15M. In 2018, the total of construction cost incurred and fair value of land is P6M. By that time, the
company estimates a reasonable profit of P1M in the sale of its land. Records also disclose a Progress
Billing in the amount of P2.2M.

The contract is considered a multiple element contract.

36) How much is the gross profit recognized by RONNA MIE on its 2018 Financial Statements?
 a. P2,000,000
b. P600,000
c. P1,500,000
d. 900,000

37) Using information in previous number alone, calculate the value of current asset in RONNA MIE’s
2018 Financial Statements.
a. P3,400,000
b. P5,600,000
c. P 1,400,000
d. P4,400,000

PROBLEM 5

On July 1, 2017, GLORY Construction Corp. contracted to build an office building for LYNDEE Inc. for a
total contract price of P2,950,000. Estimated total contract costs is P2,600,000.

Costs incurred to date are as follows related to the project were as follows:

Cost of direct materials used P200,000

Cost of direct labor (includes labor cost of site supervision) 150,000
Cost of indirect materials used 55,000
Cost incurred in securing the contract* 70,000
Annual depreciation of plant and equipment used on the contract 240,000
Payroll of design and technical department allocated to the contract 80,000
Insurance costs (2/3 for other contracts) 180,000
Costs of contracted research and development activities 105,000
Depreciation of idle equipment that is not used on a particular contract 60,000
Selling costs 45,000
General & administration costs expenses specifically included under the
terms of the contract 30,000
Borrowing cost incurred during the construction period 130,000
Costs of labor for site supervision 50,000
Advances made to subcontractors 100,000
* expensed in prior year although the contract was obtained in 2017

38) Using cost-to-cost method in determining the stage of completion, what is the realized gross profit
for the period 2017? (Round-off stage of completion to 2 decimal percentage)
a. P 111,055
b. P 125,195
c. P 134,610
d. P 141,330
PROBLEM 6

ERLEANNOR Company has started construction work on a project with a fixed contract price of
P4,500,000. ERLEANNOR expects to incur total costs of P3,375,000 on this project. During the first year
of the project, the following transactions occurred:

 Incurred cost of materials, labor and overhead used in the work, P2,700,000
 Paid costs of materials purchased but set aside for use in a future date for this project,
P225,000. These materials do not have any alternative use and cannot be sold to other parties.
 Paid and incurred rectification work not expected to be recovered, P292,500.
 Incurred general and administrative costs that are not reimbursable, P112,500.
 Incurred selling costs, P67,500.
 Incidental income from the sale of certain materials, P45,000. These specific materials were sold
since it was considered surplus from the early phase of the construction.
 The engineers determined that the original estimate of costs did not include any expected
warranty costs of P225,000.

39) Determine the profit/net income for the first year.

a. P 170,000
b. P 220,000
c. P 247,500
d. P 720,000

PROBLEM 7

Complete the following information indicated by number:

Contract price P900,000

Progress Billings Accum. Costs Completion Receivables on

Percentage Progress Billings
End of Yr. 1 P208,000 P120,000 20% 40) 58,000
End of Yr. 2 410,000 385,000 55% 41) 60,000
End of Yr. 3 900,000 720,000 100% 42) 100,000

Balance of Construction in Progress

Zero Profit Method % of Completion Method
End of Yr. 1 43) 120,000 46) 180,000
End of Yr. 2 44) 385,000 47) 495,000
End of Yr. 3 45) 720,000 48) 900,000

Income Recognized
Costs Incurred Collections on Zero Profit % of Completion
Progress Billings Method Method
Year 1 49) 120,000 P150,000 52) 0 55) 60,000
 Year 2 50) 265,000 200,000 53) 0 56) 50,000
Year 3 51) 335,000 450,000 54) 180,000 57) 70,000

PROBLEM 8

On July 1, 2015, RHEA Construction Corp. contracted to build an office building for ELMAR, Inc. for a
total contract price of P1,825,000.

2015 2016 2017

Contract cost incurred P 350,000 P 930,000 P670,000
Estimated costs to complete the contract 1,050,000 685,000 0
Billings to RX, Inc 192,500 1,420,000 212,500

58) Which of the following statements is true?

a. The inventory account, net at December 31, 2016, assuming no dependable estimates are
available amount to P386,250 due to customer.
b. The inventory account balance at December 31, 2016, using cost to cost method is P1,140,000
c. The recognized loss in 2016 using zero profit method is P246,250
d. The realized gross profit in 2017 using percentage of completion method is P15,000 and the
recognized loss in 2017 using zero profit method is P125,000.

PROBLEM 9

VINCE, Inc. works on a P10,500,000 contract in 2017 to construct an office building. During 2017, VINCE,
Inc. uses the cost to cost method. At December 31, 2017, the balances in certain accounts were:
Construction in progress – P3,780,000; Accounts receivable – P360,000; and Billings on construction in
progress – P1,800,000; Contract retention – P180,000; Mobilization fee – P140,000. At December 31,
2017, the estimated cost at completion is P7,350,000.

59) The realized gross profit in 2017.

a. P1,102,500
b. P1,062,500
c. P1,242,500
d. P1,134,000

PROBLEM 10

On January 1, 2016, MARY GRACE Construction Corp. began constructing a P2,100,000 contract. The
following are relevant information provided by the corporation: MARY GRACE uses percentage of
completion method. For the year ended December 31, 2017, MARY GRACE Construction billed its client
an additional 55% of the contract price.

2016 2017 2018

Construction in Progress P 441,000 ? ?
Estimated cost to complete ? ? -
Costs incurred 425,250 969,000 675,750
 Excess of CIP over Billings P84,000 P330,750 -
current liability current liability

Required: Compute for the following:

60) How much is the estimated remaining cost in 2016?

a. P1,599,750
b. P1,155,000
c. P1,680,000
d. P1,584,000
61) How much is the realized gross profit (loss) in 2017?
a. P(45,000)
b. P15,750
c. P(60,750)
d. P30,000

62) How much is the balance of construction in progress in 2017?

a. P1,680,000
b. P2,010,750
c. P1,349,250
d. P1,365,000

PROBLEM 11

ELMAR Construction Corporation contracted with the province of Pampanga to construct a bridge at a
contract price of P16,000,000. ELMAR Corporation expects to earn P1,520,000 on the contract. The
percentage of completion method is to be used and the completion stage is to be determined by
estimates made by the engineer. The following schedule summarizes the activities of the contract for
years 2015-2017.

Year Cost Incurred Estimated Cost Engineer’s Billings on Collection on

to Complete Estimate of Contract Billings
Completion

2015 P4,600,000 P9,640,000 31% P5,000,000 P4,500,000*

2016 4,500,000 5,100,000 58% 6,000,000 5,400,000*

2017 5,250,000 - 100% 5,000,000 6,100,000

*A 10% retainer accounts for the difference between billings and collections.

63) Under the percentage of completion method, using the engineer’s estimate as the measure of
completion to be applied to revenue and costs, how much is the gross profit earned each year?

2015 2016 2017

a. P545,600 P498,400 P606,000
b. P545,600 P1,044,000 P1,044,000
 c. P1,760,000 P6,400,000 P1,650,000
d. P1,760,000 P1,800,000 P1,650,000

PROBLEM 12

On July 1, 2031, LYNDEE Company, a construction company, emerged into a contract to construct a
commercial building for a customer on customer-owned land for promised consideration of P1,000,000
and a bonus of P200,000 if the building is completed within 24 months. At inception date, the entity
expects total construction costs of P700,000 to complete the building. The entity accounts for the
promised bundle of goods and services as a single performance obligation satisfied over time in
accordance with paragraph IFRS 15 because the customer controls the building during construction. At
contract inception, the entity cannot conclude that it is highly probable that a significant reversal in the
amount of cumulative revenue recognized will not occur with respect to inclusion of bonus to contract
price. Completion of building is highly susceptible to factors outside the entity’s influence, including
weather and regulatory approvals. In addition, the entity has limited experience with similar types of
contracts. The entity determines that the input measure, on the basis of costs incurred, provides an
appropriate measure of progress towards complete satisfaction of the performance obligation. As of
December 31, 2031, the construction costs incurred to date by LYNDEE Company is P420,000.

In the first quarter of the 2032, the parties to the contract agree to modify the contract by changing the
floor plan of the building. As a result, the fixed consideration and expected costs increase by P150,000
and P120,000, respectively. In addition, the allowable time for achieving the P200,000 bonus is extended
by 6 months to 30 months from the original contract inception date. At the date of the modification, on
the basis of its experience and remaining work to be performed, which is primarily inside the building and
not subject to weather conditions, the entity concludes that it is highly probable that including the bonus
in the transaction price will not result in a significant reversal in the amount of cumulative revenue
recognized. Despite the changes, the contractor evaluates that the remaining goods and services to be
provided using the modified contract are not distinct from the goods and services transferred on or before
the date of contract modification; that is, the contract remains a single performance obligation. For the
year ended December 31, 2032, LYNDEE Company incurred construction costs of P195,000.

64) Under IFRS 15, what is the balance of (1) Construction in Progress as of December 31, 2032 and (2)
realized gross profit to be recognized by LYNDEE Company for the year ended December 31, 2032,
respectively?
a. 1,012,500 and 97,500
b. 862,500 and 67,500
c. 1,012,500 and 217,500
d. 1,080,000 and 127,500
PROBLEM 13

On January 1, 2017, RIALYN Development Corporation (RDC) entered into a contract with AIRA Company
to construct a new corporate headquarters on land owned by AIRA Company. Contractor RDC determines
that control of the building is passed to Company B as it is constructed. Therefore, the performance
obligation is satisfied over time. The contract price is P5,000,000 but that amount will be reduced or
increased depending on when construction of the building is completed. For each day before December
31, 2019, that the building is completed, the promised consideration will increase by P25,000. For each
day after December 31, 2019 that the building is incomplete, the promised consideration will be reduced
by P25,000. The parties have also agreed that when the building is complete, it will be inspected and
assigned a green building certification level. If the building achieves the certification level specified in the
contract, Contractor RDC will be entitled to an incentive bonus of P200,000.

On December 31, 2017, RDC determined that the “expected value” better predicts the variable
consideration it will receive regarding the early completion or delay of the construction because of the
different outcomes possible based on RDC’s current construction schedule and its experience with past
projects. RDC estimates that it is 50% likely to complete the project 10 days ahead of schedule and receive
an incentive of P250,000, 25% likely to complete the project on time and receive no incentive and 25%
likely to complete the project five days past schedule and incur P125,000 penalty.

As of the same date, on the other hand, RDC determined that the “most likely amount” is the better
predictor to estimate the variable consideration associated with the green building certification bonus
because there are only two possible outcomes (P200,000 or P0). Based on its history of completing
building projects that achieve the green building certification level specified in the contracts and the
absence of factors that may indicate the criteria will not be met, RDC decided to include the bonus in the
transaction price.

On December 31, 2018, RDC did not change the estimate with respect to green building certification bonus
but after evaluating construction completed to date and the remaining project schedule, Contractor RDC
determines it is now 75% likely to complete the project 10 days ahead of schedule and receive an incentive
of P250,000 and 25% likely to complete the project on time and receive no incentive bonus.

The following construction costs were provided by RDC for the years ended December 31, 2017 and 2018:

December 31, 2017 December 31, 2018

Costs incurred during the year P2,400,000 P750,000
Estimated costs to complete at the end of the year P1,600,000 P1,350,000

65) Under IFRS 15, assuming the outcome of construction can be estimated reliably, what is the realized
gross profit/(gross loss) to be recognized by RDC for the year ended December 31, 2018?
a. (230,000)
b. (220,625)
c. (250,000)
d. (155,000)

PROBLEM 14
On January 1, 2031, VINCE Inc. entered into a construction contract with an owner to build an oil refinery.
The contract has the following characteristics. The oil refinery is highly customized to the owner’s
specifications and changed to these specification by the owner are expected over the contract term. The
oil refinery does not have an alternative use to the contractor. Non-refundable, interim progress
payments are required as a mechanism to finance the contract. The owner can cancel the contract at any
time (with a termination penalty); any work in process is the property of the owner. As a result, another
entity would not need to reperform the tasks performed to date. Physical possession and title do not pass
until completion of the contract. The contractor determines that the contract has a single performance
obligation to build the refinery. The preponderance of evidence suggests that the contractor’s
performance creates an asset that the customer controls and control is being transferred over time VINCE
Inc. concludes that input method (cost to cost method) instead of output method is a more reasonable
method for measuring the progress toward satisfying the performance obligation.

The contract duration is 3 years with total estimated contract revenue of P300M The total estimated
contract cost as of December 31, 2031 is P200M. The cost incurred during year 2031 is P120M including
P20M related to contractor-caused inefficiencies which do not represent/depict the transfer of goods or
services to the customer. As of December 2032, the total estimated contract cost becomes P250M due to
increase in cost of raw materials. The cost incurred during year 2032 is P105M including P5M related to
contractor-caused inefficiencies which do not represent/depict the transfer of goods or services to the
customer.

66) Under IFRS 15, what is the net income/(net loss) to be reported by VINCE Inc. for the years ended
December 31, 2031 and 2032, respectively?
a. 30M and (15M)
b. 50M and (10M)
c. 60M and (15M)
d. 40M and (5M)