LYCEUM OF SUBIC BAY

Subic Bay Freeport Zone

Advanced Financial Accounting Review Allan B. Santos CPA

Construction Contract

1. It is construction contract in which the contractor agrees to fixed contract price, or a fixed
rate per unit of output, which in some cases Is subjected to cost escalation clause.
A. Fixed price contract
B. Cost plus contract
C. Construction contract
D. Building contract

2. It is a construction contract in which the contractor is reimbursed for allowable or

otherwise defined costs plus a percentage of such costs or a fixed fee.
A. Fixed price contract
B. Cost plus contract
C. Combined fixed piece and cost plus contract
D. Cost escalation contract

3. Contract revenue in construction contract comprises.

A. The initial amount of revenue agreed in the contract
B. Variation in contract work, claim and incentive payment
C. The initial amount of revenue agreed in the contract, variation in contract work, claim
and incentive payment.
D. The initial amount of revenue agreed in the contract and progress billings.

4. Which statement is true in relation to contract revenue?

A. A variation is an instruction by the customer for a change in the scope of work to be
performed under a construction contract.
B. A claim is an amount that the contractor seeks to collect from them customer as
reimbursement for cost not included in the construction contract.
C. Incentive payment is an additional amount paid to the contractor if specifies
performance standards are met or exceeded.
D. All of theses statements are true about contract revenue.

5. Contract costs of a construction contract comprise all of the following, except

A. Costs that directly relate to the specific contract.
B. Costs that are attributable to contract activity in general and can be allocated to the
correct.
C. Such other costs that ate specifically chargeable to the customer under the terms of
the contract.
D. General administration costs for which reimbursement is not specified in the contract.

6. The effect of a change in the estimate of contract revenue and contract costs is accounted
for as
A. Change in accounting estimate
B. Change in accounting policy
C. Prior period error
D. Component of the other comprehensive income

7. The percentage of completion of a construction is based on all of the following, except

A. The proportion that contract costs incurred for work performed to date bear to the
estimated total contract costs.
B. Survey of work performed
C. Completion of physical proportion of the contract work
D. Progress payments and advances received from customers

8. Which of the following costs should be included in contract costs?

A. Project managers’ costs
B. Destruction of an existing building
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Advanced Financial Accounting Review Allan B. Santos CPA

C. Restoration of an old factory

D. All of these are included in contract costs

9. Which statement is true when the outcome of construction contract cannot be estimated
reliably?
A. Revenue shall be recognised only to the extent of contract costs incurred that is
probable will be recoverable.
B. Contract costs shall be recognised as an expense in the period when incurred.
C. An expected loss on the construction contract shall be recognised as an expense
immediately.
D. All of these statements are true.

10. An entity shall disclose all of the following in relation to a construction contract, except
A. The method used to determine the stage of completion
B. The method used to determine the contract revenue recognised in the period
C. Advances received in cash, analysed according to each material contract
D. Total amount of contract revenue recognised in the period

11. The gross amount due from customers presented as an asset is equal to
A. Costs incurred plus recognized profit
B. Costs incurred less recognized profit
C. Costs incurred plus recognized profit less the sum of recognized loss and progress
billings
D. Costs incurred plus the sum of recognized profit and progress billings

12. In selecting an accounting method for a long-term construction contract, the principal
factor to be considered should be
A. The terms of payment in the contract
B. The degree to which a reliable estimate of the peogress toward contract completion is
practicable
C. The method commonly used by the contractor to account for other long-term
construction contracts
D. The inherent nature of the contract’s technical facilities used in construction

13. The calculation of the income recognized in the first year of a four-year construction
contract accounted for using the percentage of completion method is generally based on
the ratio of
A. Total estimated costs to estimated costs to complete
B. Total estimated costs to actual costs incurred to date
C. Actual costs incurred to date to total estimated costs
D. Estimated costs to complete to total estimated costs

14. In accounting for a long-term construction contract using the percentage of completion
method, the amount of recognized in any year would be added to
A. Deferred revenue
B. Progress billings on contracts
C. Construction in progress
D. Property, plant and equipment

15. When should an expected loss on a long-term construction contract be recognized?

Cost recovery Percentage of completion
A. Immediately Over life of project
B. Immediately Immediately
C. Contract complete Over life of project
D. Contract complete Immediately
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Advanced Financial Accounting Review Allan B. Santos CPA

16. In accounting for a long-term construction contract using the percentage of completion
method, the progress billings on contracts account is a
A. Contra current asset account
B. Contra noncurrent asset account
C. Noncurrent liability account
D. Revenue account

17. Which of the following projects undertaken by an entity should be accounted for as a
construction contract?
A. An item of plant and machinery being constructed to be sold as inventory
B. An office block being constructed as an investment property
C. A warehouse being constructed for the entity’s own use
D. A large boat being constructed for a third party under a specifically negotiated
contract

18. All of the following could be valid reason why the expected revenue from a fixed price
construction contract should be increased from the original price, except
A. The costs in contract have increased and contract includes cost escalation clause.
B. The contractor has incurred additional costs due to errors made by the employees.
C. The contractor has agreed variations to the contract with the client
D. The contractor would receive an incentive payment if work continues ahead of
schedule and it is probable that specified performance standards are met or exceeded.

19. When work to be done and costs to be incurred on a long-term contract can be estimated
reliably, which of the following methods of revenue recognition Is preferable?
A. Completion of production method
B. Percentage of completion method
C. Cost recovery method
D. Either percentage of completion or cost recovery method.

20. The percentage of completion method must be used when certain condition exist.
Which of the following is not one of the conditions?
A. Estimates of progress toward completion can be estimated reliably.
B. Total contract revenue and contract costs can be measured reliably.
C. The client can be expected to satisfy some of the obligations under the contract.
D. It is probable that the economic benefits associated with the contract will flow to the
entity.

21. If an entity cannot estimate reliably the outcome of a construction contract, revenue
should be recognised
A. Straight line over the period of the service contract
B. By using the percentage of completion method based on costs incurred compared tot
total estimated costs.
C. By recording an equal amount of revenue for each service performed.
D. Only to the extent of the costs recoverable.

22. How should earned but unbilled revenue on a long-term construction contract be
disclosed if the percentage of completion method is used?
A. As construction in progress under current assets
B. As construction in progress under noncurrent assets
C. As a receivable under noncurrent assets
D. In a nite financial statements

23. How should the balances of progress billings and construction in progress be reported
prior to the completion of a long-term contract?
A. Progress billings as deferred revenue and construction in progress as a deferred
expense.
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Advanced Financial Accounting Review Allan B. Santos CPA

B. Progress billings as a revenue and construction in progress as inventory

C. Net, as current asset if debit balance, and current liability if credit balance.
D. Net, as income from construction if credit balance, and loss from construction if debit
balance.

LONG-TERM CONSTRUCTION

Part I: Theory of Accounts

1. It 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 and function or
their ultimate purpose or use.
a. Construction contract
b. Installment contract
c. Franchise contract
d. Consignment contract

2. It is a construction contract in which the contractor agrees to a fixed contract price, or a fixed rate
per unit output, which in some cases is subject to cost escalation clauses.
a. Fixed price contract
b. Cost plus contract
c. Variable contract
d. Mixed contract

3. 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 price contract
c. Variable contract
d. Mixed contract

4. 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 reliably 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 caused delays or errors in
specification or design.
c. Incentive payments to be paid to the contract if specified performance standards are met or
exceeded or for early completion of the contract.
d. Gain on sale of scrap materials from construction.

5. Which of the following costs shall be excluded in the contract costs of construction contract?
a. Costs that relate directly to the specific contract.
b. Costs that relate directly attributable to contract activity in general can be allocated to the
contract.
c. Such other costs as are specifically chargeable to the customer under the terms of the
contract.
d. Selling costs such as advertisement expense or commissions of real estate agents or brokers.

6. The following costs shall be capitalized as part of construction in progress or contract costs,
except
a. Costs of hiring and moving of 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 may
include some general administration costs and development costs for which reimbursement is
specified in the terms of the contract.
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d. General and research and development costs for which reimbursement is not specified in the
contract.

7. When the outcome of a construction contract can be estimated reliably, how shall contract
revenue and contracts costs associated with the construction contract be recognized?
a. They shall be recognized as revenue and expense respectively by reference to the state of
completion of the contract activity at the end of the reporting period also known as by
percentage of completion method.
b. They shall be recognized as revenue and expenses respectively by reference to the percentage
of collection of receivables from customer also known as by installment method.
c. They shall be recognized as revenue and expenses respectively by the date of earning of
revenue o incurring of expenses also known as accrual basis.
d. Revenue shall be recognized only to be extent of contract cost incurred that is probable will
be recoverable and the contract cost shall be recognized as an expense in the period in which
there are incurred also known as cost recovery or zero-profit method.

8. When the outcome of a construction contract cannot be estimated reliably, how shall contract
revenue and contracts costs associated with the construction contract by recognized?
a. They shall be recognized as revenue and expenses respectively by reference to the state of
completion of the contract activity at the end of the reporting period also known as by
percentage of completion method.
b. They shall be recognized as revenue and expenses respectively by reference to the percentage
of collection of receivables from customer also known as by installment method.
c. They shall be recognized as revenue and expenses respectively by the date of earning of
revenue o incurring of expenses also known as accrual basis.
d. Revenue shall be recognized only to be extent of contract cost incurred that is probable will
be recoverable and the contract cost shall be recognized as an expense in the period in which
there are incurred also known as cost recovery or zero-profit method.

9. When it is probable the total contract costs will exceed total contact revenue, how shall it be
accounted for?
a. The expected loss shall be recognized as an expense immediately regardless of the certainty
or uncertainty of the outcome of a construction contract.
b. The expected loss shall be recognized as an expense immediately only when the outcome of a
construction cannot be estimated reliably.
c. The expected loss shall be recognized as an expense by reference to the state of completion of
the contract activity at the end of the reporting period when the outcome of a construction
contract cannot be estimated reliably.
d. The expected loss shall be accounted for based on company’s policy.

10. When the company decides to change its accounting for construction contract from percentage of
completion to cost recovery method, how shall the accounting change be treated?
a. It shall be accounted as a change in accounting policy treated by retrospective application or
with cumulative effect in the beginning retaining earnings at the date of change.
b. It shall be accounted for as a change in account estimate treated by prospective application to
the date of change and future date profit and loss.
c. It shall be accounted for as a prior period error treated by retrospective restatement or with
cumulative effect in the beginning retaining earnings at the date of discovery of error.
d. It shall be accounted for as an equity transaction to be adjusted in the share premium or other
comprehensive income as the case may be.

11. When the company changes its percentage of completion of the construction project every year,
how shall the accounting change be treated?
a. It shall be accounted for as a change in accounting policy treated by retrospective application
or with cumulative effect in the beginning retaining earnings at the date of change.
b. It shall be accounted for as a change in account estimate treated by prospective application to
the date of change and future date profit or loss.
c. It shall be accounted for as a prior period error treated by retrospective restatement or with
cumulative effect in the beginning retaining earnings at the date of discovery of error.
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Advanced Financial Accounting Review Allan B. Santos CPA

d. It shall be accounted for as an equity transaction to be adjusted in the share premium or other
comprehensive income as the case may be.

12. How shall the contractor present in its statement of financial the accounts related to construction
contract?
a. It shall present as an asset the gross amount due from customers for contract work which is
the net amount of cost incurred plus recognized profits less the sum of recognized losses and
progress billings for all contracts in progress for which costs incurred plus recognized profits
or less recognized losses exceeds progress billings. (Meaning: It is presented as an asset if or
less recognized losses exceeds Progress billings)
b. It shall present as a liability the gross amount due to customers for contract work is the net
amount of cost incurred plus recognized profits less the sum of recognized losses and
progress billings for all contracts in progress for which progress billings exceeds costs
incurred plus recognized profits or less recognized losses. (Meaning: It is presented as a
liability if progress billings exceeds construction in progress)
c. Either A and B but the liabilities and assets resulting from difference of Construction in
Progress and Progress Billings shall not be netted or offsetted in the statement in the
Statement of financial Position.)
d. Both A and B but the liabilities and assets resulting from the difference of construction in
Progress ang Progress billings shall be netted or offsetted in the statement of Financial
Position.

13. Which of the following accounting change shall be treated retrospectively instead 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

Part II: Problem Solving

1. On July 1, 2016, ABC Construction Corp. contracted to build an office building for XYZ, Inc. for
a total price of P975,000.
2016 2017 2018
Contract cost incurred to date 75,000 600,0001,050,000
Estimated costs to complete the contract 675,000400,000 -
Billings to XYZ, Inc. 150,000550,000275,000
1. Under the percentage of completion method, how much is the Construction-in-Progress
at December 31,2017?
a. 650,000
b. 575,000
c. 672,500
d. 597,500

2. Under the zero-profit method, how much is the Construction-in-Progress, net of

Progress Billings at December 31, 2017?
a. (125,000)
b. 125,000
c. 50,000
d. (50,000)

3. Under the percentage of completion method, how much is the realized gross profit/ (loss)
at December 31, 2018?
a. (75,000)
b. (100,000)
c. (50,000)
d. (72,500)

2. EFG Construction was recently awarded a P6,730,000 contract to construct a trade center for
Ayala Inc. EFG Construction estimates it will take 46 months to complete the contract. The
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Advanced Financial Accounting Review Allan B. Santos CPA

company uses the percentage of completion method to estimate profits. (use two decimal places
for the percentage of completion). Example 62.48%

The following information details the actual and estimated costs for the year 2017-2018:

Year Actual Cost Each Year Estimated Cost to Complete

2017 3,120,000 3,264,000
2018 1,584,000 1,800,000
2019 1,152,000 912,000
2020 1,080,000 -

How much is the balance of Construction in Progress account as of 2019?

a. 5,818,000
b. 5,856,000
c. 5,808,000
d. 5,800,000

3. DM, Inc. works on a P105,500,000 contract in 2016 to construct an office building. During 2016,
DM, Inc. uses the cost method. At December 31, 2016, the balances in certain account were:

Construction in progress – P3,780,000

Accounts receivable – P360,000
Billings on construction in progress – P1,800,000
Contract retention – P180,000
Mobilization – P140,000
At December 31, 2016, the estimated cost at completion is P7,350,000

How much is the realized gross profit in 2016?

a. 1,102,500
b. 1,062,500
c. 1,242,500
d. 1,134,000

4. On January 1, 2016, Brave Construction Corporation began constructing a P2,100,000 contract.

The entity used the percentage of completion method. For the year ended December 31, 2017,
Brave Construction billed its client an additional 55% of the contract price.

Construction in progress 441,000 ? ?

Estimated cost to complete ? ? -
Costs incurred 425,250969,000675,750
Excess of construction in progress ( 84,000) (330,750) -
Over billings or (excess of billings over
Construction in progress)

1. How much is the estimated remaining cost in 2016?

a. 1,599,750
b. 1,155,000
c. 1,680,000
d. 1,584,000

2. How much is the realized gross profit (loss) in 2017?

a. (45,000)
b. 15,750
c. (60,000)
d. 30,000

3. How much is the balance of construction in progress in 2017?

a. 1,680,000
b. 2,010,750
c. 1,349,250
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d. 1,365,000

5. Avista Company is one of the leading construction firms in the country. On January 1, 2021, it
entered into a long-term construction contract with a fixed contract price of P4,500,000. The
construction started on July 1, 2021 and ended on October 31, 2023. The following costs were
provided by the chief accountant of Avista Company:

2021 2022 2023

Construction costs P1,000,000 P2,916,000 P4,556,250
incurred to date
Estimated costs to P3,000,000 P1,640,250 P-0-
complete as of the
end of the year

Assuming the outcome of the construction can be estimated reliably and the company
decide to employ cost-to-cost method, what is the amount of (1) revenue from long-term
contract, (2) costs of construction and (3) gross profit/ (loss), respectively to be reported by
Avista Company for the year ended December 31, 2022?
a. 1,734,750 and 1,916,000 and (181,250)
b. 1,755,000 and 1,936,250 and (181,250)
c. 1,859,250 and 1,916,000 and (56,250)
d. 1,755,000 and 1,811,250 and (56,250)

6. On July 1, 2031, Torela Company, a construction company entered 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 he building is completed within 24 months. An 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 the building is highly
susceptible to factors outside the entity’s influence, including weather and regulatory approvals.
In addition, the entity has limited experience 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 Torela 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 the remaining work to be
performed, which is primarily inside the building and not subject to weather conditions, the entity
concludes that it is highly probable that including the bonus in the transaction price will not result
in a significant reversal in the amount of cumulative revenue recognized. 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, Torela Company incurred construction costs of P195,000.

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 Torela 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
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Advanced Financial Accounting Review Allan B. Santos CPA

d. 1,080,000 and 127,500

7. On January 1, 2017, Matibay development Corporation (MDC) entered into a contract with
Company B to construct a new corporate headquarters on land owned by Company B. Contractor
MDC determines that control of the building is passed to Company B as it is constructed.
Therefore, the performance obligation is satisfied over time. The contractor 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 reduce 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 MDC
will be entitled to an incentive bonus of P200,000.

On December 31, 2017, MDC 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 outcome possible based on MDC’s current construction schedule and its
experience with past projects. MDC 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 a P125,000 penalty.

As of the same date, on the other hand, MDC 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 contract and the absence of factors that may indicate the criteria will not be met,
MDC decided to include the bonus in the transaction price.

On December 31, 2018, MDC did not change its estimate with respect to green building
certification bonus but after evaluation evaluating construction completed to date and the
remaining project schedule, Contractor MDC determine 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 MDC for the year ended December 31, 2017,
and 2018:

December 31, 2017 December 31, 2018

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

Under IFRS 15, assuming the outcome of construction can be estimated reliably, what is the
realized gross profit/ (loss) to be recognized by MDC for the year ended December 31, 2018?

a. (230,000)
b. (220,625)
c. (250,000)
d. (155,000)

8. On January 1, 2031, Megaland 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 changes to these specifications 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 mechanics to finance the contract. The
owner can cancel the contract at any time (with a termination penalty); any work in process is the
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property of the owner. As a result, another entity would not need to reperform the tasks performed
to date. Physical possession and title and 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. Megaland Inc. concludes that
input method (cost to cost method) instead of output method is a more reasonable method for
measuring the progress toward satisfying its 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 and services to the customer. As of December 31, 2032, the total estimated
contract cost becomes P250M due to increase in cost of raw materials. The cost incurred during
year 2032 is P150M including P5M related to contractor-caused inefficiencies which do not
represent/depict the transfer of goods or services to the customer.

Under the IFRS 15, what is the net income/(net loss) to be reported by Megaland 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)

9. Filvida Inc. entered into a long-term construction contract in January 1, 2016 to construct a
shopping mall at a fixed contract price of P10M. Filvida determined that the outcome of the
construction cannot be estimated reliably. Filvida normally bills its customer 50% at the middle
offirst year, 20% at the middle of second year and the balance at the date of completion of project.
A mobilization fee of 10% of the contract price (deductible from the final bill) is payable 30 days
after the contract signing. The contract provides that the customer shall pay 80% of the amount
billed during the year on or before the December 31 subject to retention provision/withholding by
customer of 5% of amount to be paid by the customer which is intended to protect the customer
from the contractor failing to adequately complete its obligation under the contract. The customer
satisfaction complied with the contractual provision. Filvida’s accountant provide the following
data for the years ended December 31, 2016 and December 31, 2017:

December 31, 2016 December 31, 2017

Costs incurred date P4,000,000 P7,000,000
Estimated costs to complete P9,000,000 P4,000,000
as of this date

What is the 12/31/2017 (1) Due from /(to) Customer, 12/31/2017 (2) excess of construction in
progress over progress billings and 2017 (3) realized gross profit/(loss), respectively to be
presented by Filvida Inc.?

a. 680,000 and (1,000,000) and 2,000,000

b. 400,000 and (3,000,000) and 0
c. 1,400,000 and 4,000,000 and (3,000,000)
d. 320,000 and (2,000,000) and (1,000,000)

-END-