CHAPTER # 7

REVENUE RECOGNITION– CONTRACTS WITH

TITLE
CUSTOMERS: CONSTRUCTION ACCOUNTING

B. DEVELOPMENTAL ACTIVITIES

INTRODUCTION

A construction contract is a contract specifically negotiated for the construction of an asset or a combination of assets
that are closely interrelated or interdependent in terms of their design, technology or function or their ultimate
purpose or use. Construction contracts are generally long-term, thus, the primary issue in its accounting is the timing
of recognition of contract revenue and contract costs
Construction contracts include:
 Contracts for rendering services which are directly related to the construction of the asset.
 Contracts for the destruction or restoration of assets, and the restoration of the environment following the
demolition of the assets.

TRANSACTION PRICE

In construction contracts, the transaction price normally consists the following:

 The contract price; and
 Any subsequent variations in the contract to the extent that it is probable that they will result in revenue and
they are capable of being measured reliably.

Two Types of Construction Contract / Contract Price

1. Fixed Price Contract – 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.
2. Cost-plus Contract – a construction contract in which the contractor is reimbursed for allowable or
otherwise defines costs, plus percentage of these costs or a fixed fee.
a. Cost-plus-variable-fee Contract – the contractor is reimbursed for agreed costs with no provision
for fixed fee. Instead, the fee is determined by applying an agreed percentage to the total
reimbursable costs. The total contract price is the sum of reimbursable costs and the percentage
based on these costs.
b. Cost-plus-fixed-fee Contract – the contractor is reimbursed for agreed costs plus fixed fee. The
total contract price is the sum of reimbursable cost and the fixed fee.

REVENUE RECOGNITION

Revenue recognition depends on the performance obligations:

A. Overtime/ Percentage of completion if any of the following criteria is met:

 Customer simultaneously receives and consumes all of the benefits.
 The entity work creates or enhances an asset controlled by the customer.
 The entity’s performance does not create an asset with an alternative use to the entity and the
entity has an enforceable right to payment for performance completed to date.
B. Point in time/ Cost recovery method, if none of the criteria above is met.

Method of recognizing revenue:

Percentage of completion (Overtime) -when the outcome of the construction contract can be estimated reliably,
contract revenue and contract costs associated with the contract should be recognized as revenue and expenses,
respectively, by reference to the stage of completion (progress).

 Methods of Measuring Progress:

o Input Methods/ Cost Basis - recognise revenue on the basis of the entity’s efforts or inputs to the
satisfaction of a performance obligation.
 Cost-to-cost method – the degree of completion is determined by comparing costs
already incurred with the most recent estimates of total expected costs to complete the
project.
 The percentage that cost incurred bear to total expected costs is applied to the
contract price to determine the revenue to be recognized to date as well as the
expected net income on the project in arriving at earnings to date.
 Efforts-expended method – based on some measure of work performed.
  Includes (but not limited to) labor hours, labor pesos, machine hours, or material
quantities
 The ratio of the measure of work performed over the estimated total estimated
measure of work will determine the percentage of completion to be used in
computing the revenue.
o Output Methods/ Sales Basis - recognise revenue on the basis of direct measurements of the
value to the customer of the goods or services transferred to date relative to the remaining goods
or services promised under the contract. It include methods such as surveys of performance
completed to date, appraisals of results achieved, milestones reached, time elapsed and units
produced or units delivered.
 Proportional Cost Approach – the cost incurred computed under this method may not
equal to the actual costs incurred.
 Actual Cost Approach – the cost incurred completed under this method should be equal
to cost actually incurred.

Cost recovery method/Zero profit method (Point in time) - when the outcome of the construction contract cannot
be estimated reliably. The following treatment must be followed:
 Recognize revenue only to the extent of contract cost incurred which are expected to be recoverable
 Recognize contact cost as an expense in the period they are incurred.

CONTRACT COSTS

Construction costs include the following:

 Cost that relate directly to specific contract:

 Direct labor cost (Site labor costs and supervision)
 Direct materials used in construction
 Depreciation of plant and equipment used on the construction
 Cost of moving the materials, plant and equipment to and from the site
 Cost of hiring plant and equipment
 Design and technical assistance that are directly related to contract
 Estimated costs of rectification and guarantee work, including expected warranty work
 Claims from third parties
 Costs that are attributable to contract activity in general and can be allocated to the contract:
 Insurance
 Cost of design and technical assistance not directly related to a specific contract
 Construction overheads
 Costs that is explicitly chargeable to the customer under the contract. It may include general administration
costs and development costs.
 Other costs that are incurred only because an entity entered into the contract such as payments to
subcontractors.

The following costs are to be recognized as expenses when incurred:

 general and administrative costs (unless those costs are explicitly chargeable to the customer under the
contract);
 costs of wasted materials, labour or other resources to fulfill the contract hat were not reflected in the price
of the contract;
 costs that relate to satisfied performance obligations (or partially satisfied performance obligations) in the
contract (ie costs that relate to past performance); and
 costs for which an entity cannot distinguish whether the costs relate to unsatisfied performance obligations
or to satisfied performance obligations (or partially satisfied performance obligations).

PRESENTATION

During the life of the contract, the difference between the Construction in Progress and the Progress Billings is
recognized in the statement of financial position as follows:

 Contract Asset (Current Asset) = excess of Construction in Progress over Progress Billings
 Contract Liability (Current Liability) = excess of Progress Billings over Construction in Progress

 Construction in Progress - It comprises of total costs incurred on the contract, plus the cumulative
recognized profit, if any, or less cumulative recognized loss.
 Progress Billings – the amount actually invoiced to customers for work performed on a contract whether or
not they have been paid by the customer.
ILLUSTRATION

VVL Construction Company agrees to build a large office building for JK Towers for a total contract price of
P5,000,000. JK Towers will make annual payments to VVL but the amount of these payments cannot exceed the
direct costs incurred by VVL. The contract is signed on October 1, 2020 and VVL’s year-end is December 31. The
contract provides JK with final inspection right to ensure compliance with the contract terms prior accepting the
completed project.

Additional Information:

Total contract price P5,000,000

Total Anticipated Costs (at 10/2020) 4,500,000
Item 2020 2021 2022 Total
Cost incurred each year P1,350,000 P2,250,000 P400,000 P4,000,000
Estimated cost to complete (at year end) 3,150,000 400,000 - -
Progress billings each year 400,000 2,000,000 2,600,000 5,000,000
Progress Payments received each year 275,000 2,100,000 2,625,000 5,000,000

Cost-to-cost (Percentage of Completion) Method:

Step 1: Identify the contract with a customer.

 The contract is a construction contract.

Step 2: Identify the separate performance obligations within a contract.

 The performance obligation is to construct a large office building for JK Towers.

Step 3: Determine the transaction price.

 The Transaction Price is P5,000,000

Step 4: Allocate the transaction price.

With only one performance obligation, VVL allocates the entire transaction price to the construction of office building.

Step 5: Recognize Revenue when (or as) each performance obligation is satisfied.

CASE 1: Using Percentage of Completion Method (Over time)

2020 2021 2022
Total Contract Price P5,000,000 P5,000,000 P5,000,000
Cost Incurred to Date 1,350,000 3,600,000 4,000,000
Estimated Cost to Complete 3,150,000 400,000 -
Total Estimated Costs to Complete (4,500,000) (4,000,000) (4,000,000)
Expected Gross Profit 500,000 1,000,000 1,000,000
x % of Completion 30% 90% 100%
Gross Profit Earned to Date 150,000 900,000 1,000,000
Profit Earned in Prior Years - (150,000) (900,000)
Gross Profit Earned This Year P150,000 P750,000 P100,000

Supporting Computation:
2020 2021 2022
Cost Incurred This Year P1,350,000 P2,250,000 P400,000
Cost Incurred in the Previous Years - 1,350,000 3,600,000
Cost Incurred to Date 1,350,000 3,600,000 4,000,000
Divided by: Total Estimated Costs to Complete 4,500,000 4,000,000 4,000,000
Percentage of Completion 30% 90% 100%

Journal Entries:
2020
Construction in Progress 1,350,000
Cash 1,350,000
To record cost incurred in 2020.

Accounts Receivable 400,000

Progress Billing 400,000
To record progress billing in 2020.
 Cash 275,000
Accounts Receivable 275,000
To record collection of billing in 2020.

Construction in Progress 150,000

Cost of Construction 1,350,000
Construction Revenue 1,500,000
To record recognition of revenue in 2020.

2021
Construction in Progress 2,250,000
Cash 2,250,000
To record cost incurred in 2021.

Accounts Receivable 2,000,000

Progress Billing 2,000,000
To record progress billing in 2021.

Cash 2,100,000
Accounts Receivable 2,100,000
To record collection of billing in 2021.

Construction in Progress 750,000

Cost of Construction 2,250,000
Construction Revenue 3,000,000
To record recognition of revenue in 2021.

2022
Construction in Progress 400,000
Cash 400,000
To record cost incurred in 2022.

Accounts Receivable 2,600,000

Progress Billing 2,600,000
To record progress billing in 2022.

Cash 2,625,000
Accounts Receivable 2,625,000
To record collection of billing in 2022.

Construction in Progress 100,000

Cost of Construction 400,000
Construction Revenue 500,000
To record recognition of revenue in 2022.

Progress Billings 5,000,000

Construction in Progress 5,000,000
To eliminate inventory account in 2022.

Presentation:
2020 2021 2022
Construction in Progress 1,500,000 4,500,000 -
Progress Billings (400,000) (2,400,000) -
Contract Asset (Liability) 1,100,000 2,100,000 -

CASE 2: Using Cost Recovery Method (Point in Time)

2020 2021 2022
Construction Revenue P1,350,000 P2,250,000 1,400,000
Cost Incurred This Year 1,350,000 2,250,000 400,000
Gross Profit Earned This Year P0 P0 P1,000,000

Journal Entries:
2020
Construction in Progress 1,350,000
 Cash 1,350,000
To record cost incurred in 2020.

Accounts Receivable 400,000

Progress Billing 400,000
To record progress billing in 2020.

Cash 275,000
Accounts Receivable 275,000
To record collection of billing in 2020.

Cost of Construction 1,350,000

Construction Revenue 1,350,000
To record recognition of revenue in 2020.

2021
Construction in Progress 2,250,000
Cash 2,250,000
To record cost incurred in 2021.

Accounts Receivable 2,000,000

Progress Billing 2,000,000
To record progress billing in 2021.

Cash 2,100,000
Accounts Receivable 2,100,000
To record collection of billing in 2021.

Cost of Construction 2,250,000

Construction Revenue 2,250,000
To record recognition of revenue in 2021.

2022
Construction in Progress 400,000
Cash 400,000
To record cost incurred in 2022.

Accounts Receivable 2,600,000

Progress Billing 2,600,000
To record progress billing in 2022.

Cash 2,625,000
Accounts Receivable 2,625,000
To record collection of billing in 2022.

Construction in Progress 1,000,000

Cost of Construction 400,000
Construction Revenue 1,400,000
To record recognition of revenue in 2022.

Progress Billings 5,000,000

Construction in Progress 5,000,000
To eliminate inventory account in 2022.

Presentation:
2020 2021 2022
Construction in Progress 1,350,000 3,600,000 -
Progress Billings (400,000) (2,400,000) -
Contract Asset (Liability) 950,000 200,000 -

RECOGNITION OF EXPECTED AND ANTICIPATED LOSSES

 When it is probable that total contract costs will exceed total contract revenue, the expected or anticipated
 loss should be recognized as an expense (or loss) immediately.
 Estimated losses on long-term contracts must always be recognized fully in the accounting period when
loss estimate was made irrespective of:
o whether or not the work has commenced on the contract;
o the stage of completion of the contract activity; or
o the amount of profits expected to arise on other contracts which are not treated as a single
construction contract.

CASE 3: Loss in the year of revision of estimated costs but profit in total contract.
Revising the illustration given above, assume that at the end of 2021, the estimated cost to complete was increased
to P1,200,000 and this was the actual cost incurred in 2022.

3.a. Using Percentage of Completion Method (Over time)

2020 2021 2022
Total Contract Price P5,000,000 P5,000,000 P5,000,000
Cost Incurred to Date 1,350,000 3,600,000 4,800,000
Estimated Cost to Complete 3,150,000 1200,000 -
Total Estimated Costs to Complete (4,500,000) (4,800,000) (4,800,000)
Expected Gross Profit 500,000 140,000 140,000
x % of Completion 30% 75% 100%
Gross Profit Earned to Date 150,000 105,000 140,000
Profit Earned in Prior Years - (150,000) (105,000)
Gross Profit Earned This Year P150,000 P(45,000) P35,000

Supporting Computation:
2020 2021 2022
Cost Incurred This Year P1,350,000 P2,250,000 P1,200,000
Cost Incurred in the Previous Years - 1,350,000 3,600,000
Cost Incurred to Date 1,350,000 3,600,000 4,800,000
Divided by: Total Estimated Costs to Complete 4,500,000 4,800,000 4,800,000
Percentage of Completion 30% 75% 100%

To record revenue recognition:

Construction in Progress 150,000
Cost of Construction 1,350,000
Construction Revenue 1,500,000
To record recognition of revenue in 2020.

Cost of Construction 2,250,000

Construction in Progress 45,000
Construction Revenue 3,000,000
To record recognition of revenue in 2021.

Construction in Progress 35,000

Cost of Construction 1,200,000
Construction Revenue 1,235,000
To record recognition of revenue in 2022.

3.b. Using Cost Recovery Method (Point in Time)

2020 2021 2022
Construction Revenue P1,350,000 P2,250,000 1,400,000
Cost Incurred This Year 1,350,000 2,250,000 1,200,000
Gross Profit Earned This Year P0 P0 P200,000

To record revenue recognition:

Cost of Construction 1,350,000
Construction Revenue 1,350,000
To record recognition of revenue in 2020.

Cost of Construction 2,250,000

Construction Revenue 2,250,000
To record recognition of revenue in 2021.

Construction in Progress 200,000

 Cost of Construction 1,200,000
Construction Revenue 1,400,000
To record recognition of revenue in 2022.

CASE 4: Loss in the year of revision of total estimated costs but overall loss on the contract.

Revising the illustration given above, assume that at the end of 2021, the estimated cost to complete was increased
to P1,500,000 and this was the actual cost incurred in 2022.

4.a. Using Percentage of Completion Method (Over time)

2020 2021 2022
Total Contract Price P5,000,000 P5,000,000 P5,000,000
Cost Incurred to Date 1,350,000 3,600,000 5,100,000
Estimated Cost to Complete 3,150,000 1,500,000 -
Total Estimated Costs to Complete (4,500,000) (5,100,000) (5,100,000)
Expected Gross Profit 500,000 (100,000) (100,000)
x % of Completion 30% - -
Gross Profit Earned to Date 150,000 (100,000) (100,000)
Profit Earned in Prior Years - (150,000) -
Gross Profit Earned This Year P150,000 P(250,000) -

Supporting Computation:
2020 2021 2022
Cost Incurred This Year P1,350,000 P2,250,000 P1,500,000
Cost Incurred in the Previous Years - 1,350,000 3,600,000
Cost Incurred to Date 1,350,000 3,600,000 5,100,000
Divided by: Total Estimated Costs to Complete 4,500,000 5,100,000 5,100,000
Percentage of Completion 30% 71% 100%

To record revenue recognition:

Construction in Progress 150,000
Cost of Construction 1,350,000
Construction Revenue 1,500,000
To record recognition of revenue in 2020.

Cost of Construction 2,250,000

Construction in Progress 250,000
Construction Revenue 2,000,000
To record recognition of revenue in 2021.

Cost of Construction 1,500,000

Construction Revenue 1,500,000
To record recognition of revenue in 2022.

4.b. Using Cost Recovery Method (Point in Time)

2020 2021 2022
Total Contract Price P5,000,000 P5,000,000 P5,000,000
Cost Incurred to Date 1,350,000 3,600,000 5,100,000
Estimated Cost to Complete 3,150,000 1,500,000 -
Total Estimated Costs to Complete (4,500,000) (5,100,000) (5,100,000)
Expected Gross Profit 500,000 (100,000) (100,000)

2020 2021 2022

Construction Revenue P1,350,000 P2,150,000 1,500,000
Cost Incurred This Year 1,350,000 2,250,000 1,500,000
Gross Profit Earned This Year P0 P(100,000) P0

To record revenue recognition:

Cost of Construction 1,350,000
Construction Revenue 1,350,000
To record recognition of revenue in 2020.

Cost of Construction 2,250,000

Construction in Progress 100,000
 Construction Revenue 2,150,000
To record recognition of revenue in 2021.

Cost of Construction 1,500,000

Construction Revenue 1,500,000
To record recognition of revenue in 2022.

VARIABLE CONSIDERATIONS

The following are the common examples of variable consideration in construction contracts:
 Penalties – it is a financial payment imposed in the event of a breach of contract (i.e. a reduction in
transaction price in case construction is not completed within the stipulated date of completion)
 Incentive Payments – it is an additional amount paid to the contractor if specified performance standards are
met or exceeded. (i.e. an addition to transaction price as an incentive payment for early completion)
 Cost escalations – it is a contractual provision that stipulates an increase in the contract price in the event of
an increase in certain costs

VARIATIONS ON THE CONTRACT (CHANGE ORDERS)

A variation is an instruction by the customer for a change in the scope of the work to be performed under the
contract. The following are examples of variations:
 Changes in the specifications or design
 Changes in the scope of work
 Changes in the duration of the contract
 Renegotiations on the originally agreed contract

CONTRACT RETENTION

Retentions are amounts of progress billings which are no paid until the satisfaction of conditions specified in the
contract for the payment of such amounts or until defects have been rectified. It is presented in the statement of
financial position as a current asset. For example, out of the total billing of P1,000,000, 10% is agreed upon as
contract retention, only P900,000 will be collected by the contractor. The entry of collection would be:

Cash 900,000
Contract Retention 100,000
Accounts Receivable 1,000,000
To record the collection.

Upon completion of the project, the balance of the account once paid by the customers will be closed by:

Cash 100,000
Contract Retention 100,000
To close the contract retention account.

C. CLOSURE ACTIVITIES

The following work exercises intend to evaluate what the learners have learned in this topic. Write your answers in
your portfolio journal.

I. MULTIPLE CHOICE THEORIES

1. The Billings in Construction in Progress account is a(n):

a. contact revenue account
b. inventory account
c. contra-inventory account
d. construction expense account
2. Revenue on a long-term contract should not be recognized according to the proportion of the performance
obligation that has been completed if:
a. completion rates are certain
b. profits are low
c. projects are more than five years to completion
 d. the arrangement does not qualify for revenue recognition over time
3.With respect to delaying revenue recognition until completion of a long-term contract, it is the case that:
a. estimated losses on the overall contract are recognized before the contract is completed
b. expenses are recognized each period, but revenue is only recognized when the contract is completed
c. use of this approach is not permitted under generally accepted accounting principles.
d. neither gains nor losses are recognized until the contract is completed
4.Companies recognize revenue only when
a. a contract is reasonably likely to exist
b. a performance obligation is designated in a written contract
c. a written contract is in place and payment is variable
d. control over goods or services has been transferred from the seller to the customer
5. A rationale for recognizing revenue over the life of contract rather than at a single point in time is that:
a. results are more conservative
b. it provides a better measure of periodic accomplishment
c. it is a better match with legal ownership
d. it results in a lower income tax.

II. TRUE OR FALSE

1. When a customer is billed for payment due, a billing on contracts in progress is credited at the same time
accounts receivable is debited.
2. There is no way to tell how revenue recognition timing will affect the size of the contract asset without more
information.
3. Long-term construction contracts typically include multiple performance obligations because of all the
different types of goods and services included for each project.
4. Long-term construction contracts often satisfy the criteria for recognizing revenue over time.
5. Contract assets are likely to be smaller if revenue is recognized at a point in time
6. Long-term construction contracts could show a contract asset or contract liability, depending on the relation
between construction in progress and billings.
7. Billings on contracts in progress is contra account to account receivable
8. Gross profit is debited to construction in progress
9. Contract asset are likely the same size regardless of whether revenue is recognized over time or at a pint in
time
10. Long-term construction contracts require accounting for construction in progress as well as billings to
customers.

III. PROBLEMS

Problem 1: In 2020, DJ Builders Construction agreed to construct an apartment building at a price of P2,000,000.
The information relating to the costs and billings for the contract is as follows:
2020 2021 2022
Direct and allocable costs to date 560,000 1,200,000 1,570,000
Estimated costs yet to be incurred 1.040,000 400,000 -
Customer billings each year 750,000 560,000 730,000
Collection of billings each year 560,000 640,000 840,000

During 2021 the customer agrees to a variation with increases expected revenue from the contract by 40,000 and
causes additional costs of 20,000. At the end of 2020, there are materials stored on site for use in 2021 which cost
16,000 during the period.

Required:

A. Prepare journal entries each year using:

(a) Percentage-of-completion
(b) Cost Recovery method assuming that at the beginning and end of 2020 (also in 2021) the contractor cannot
estimate the outcome of the contract with sufficient reliability to estimate the project’s percentage of completion. It is
highly likely that the contract price will be received from the customer. However, it is probable that the costs incurred
in 2020 and 2021 will be recoverable. The contract was completed in 2022.
B. Determine the following using (a) Percentage of Completion and (b) Cost Recovery Method:
1. The balance sheet in 2020, 2021 and 2022 would report a current asset (current liability) of:
2. The revenue recognized in 2020, 2021 and 2022.
3. The construction costs in 2020, 2021 and 2022.
4. The gross profit recognized in 2020, 2021 and 2022.

Problem 2: DJ Builders Construction enters into a contract with a customer to build a warehouse for 850,000 on
March 30, 2020 with performance bonus of P50,000 is the building is completed by July 31, 2020. The bonus is
reduced by 10,000 each week that completion is delayed. DJ Builders commonly includes these completion bonuses
in its contracts and, based on the prior experience, estimates the following outcomes:
Completed by: Probability
July 31, 2020 65%
August 7, 2020 25%
August 14, 2020 5%
August 21, 2020 5%
The transaction price amounted to:

Problem 3: On July 1, 2020, ABC Construction Corp. contracted to build an office building for XYZ, Inc. for a total
contract price of 975,000.

2020 2021 2022

Contract cost incurred to date 75,000 600,000 1,050,000
Estimated costs to complete the contract 675,000 400,000 -
Billings to XYZ, Inc. 150,000 550,000 275,000

1. Under the percentage of completion method, how much is the Construction in Progress at December 31,
2021?
2. Under the zero profit method, how much is the Construction in Progress, net of Progress Billings at
December 31, 2021?
3. Under the percentage of completion method, how much is the realized gross profit/(loss) at
December 31, 2021?

Problem 4: On January 1, 2018, Solid Company accepted a long term construction project for an initial contract price
pf 1,000,000 to be completed on June 30, 2020. On January 1, 2019, the contract price was increased to 1,500,000
by reason of change in the design of the project. The outcome of the construction contract can be estimated reliably.
The project was completed on December 31, 2020 which resulted to a penalty amounting to 200,000, the entity
provided the following data concerning the direct costs relate to the said project for 2018 and 2019.

2018 2019
Cost during the year 440,000 680,000
Remaining estimated costs to complete at year end 660,000 280,000

1. What is the realized gross profit for the year ended December 31, 2019?
2. What is the balance of construction in progress on December 31, 2019?

Problem 5: DM Corp. works on a 10,500,000 contract in 2020 to construct an office building. During 2020, DM Corp
uses the cost to cost method. At December 31, 2020, the balances in certain accounts were:
Construction in Progress- 3,780,000
Accounts receivable- 360,000
Billings on Construction in process- 1,800,000
Contract retention- 180,000
Mobilization fee- 140,000

At December 31, 2020, the estimated cost at completion is 7,350,000. How much is the realized gross profit in 2020?

Problem 6: You are required to complete the following information

Contract Price………………………………………………………………………………….P900,000

Progress billings Acc. Cost Completion % Receivables on

Billings
End of Yr.1 P208,000 P120,000 20% a)
End of Yr.2 P410,000 P385,000 55% b)
End of Yr.3 P900,000 P720,000 100% c)

Construction in Progress

Zero profit % of completion

End of Yr.1 d) g)
End of Yr.2 e) h)
End of Yr.3 f) i)
 Income Recognized

Cost incurred Collections on Zero profit method % of completion

Billings
Year1 J) P150,000 m) p)
Year2 k) P200,000 n) q)
Year3 l) P450,000 o) r)

Problem 7: On January 1 2020 Power Construction Corp began constructing a P3.5 M contract. As of yearend, the
following relevant information was provided by the Corp.

2020 2021 2022

Construction in Progress P 735,000 P2,248,750 P ?
Est. cost to complete 2,666,250 1,251,250 -
Cost incurred 708,750 1,615,000 1,126,250

a. How much is the realized gross profit (loss) in 2021 using the % of completion method?

b. How much is the realized gross profit (loss) using zero profit method in 2022?

IV. SYNTHESIS/ GENERALIZATION

CHAPTER SUMMARY:
 A construction contract is a contract specifically negotiated for the construction of an asset or a combination
of assets that are closely interrelated or interdependent in terms of their design, technology or function or
their ultimate purpose or use.
 Revenue recognition depends on the performance obligations:
o Overtime/ Percentage of completion
o Point in time/ Cost recovery method
 Percentage of completion (Overtime) -when the outcome of the construction contract can be estimated
reliably, contract revenue and contract costs associated with the contract should be recognized as revenue
and expenses, respectively, by reference to the stage of completion (progress).
 Cost recovery method/Zero profit method (Point in time) - when the outcome of the construction
contract cannot be estimated reliably.
 Estimated losses on long-term contracts must always be recognized fully in the accounting period when
loss estimate was made.
 Changes in progress are accounted for prospectively.
 Formula for gross profit earned this year using percentage of completion method

Total Contract Price xxx

Cost Incurred to Date xxx
Estimated Cost to xxx
Complete
Total Estimated Costs to (xxx)
Complete
Expected Gross Profit xxx
x % of Completion x%
Gross Profit Earned to Date xxx
Profit Earned in Prior Years (xxx)
Gross Profit Earned This xxx
Year

 Formula for computing percentage of completion

Year
Cost Incurred This Year xxx
Cost Incurred in the Previous Years xxx
Cost Incurred to Date xxx
Divided by: Total Estimated Costs to Complete xxx
Percentage of Completion xx%

 Formula for determining contract asset (liability)

 Year
Construction in Progress xxx
Progress Billings (xxx)
Contract Asset (Liability) xxx
V. EVALUATION

The student’s performance will be evaluated as follows:

20% Attendance, Poll Questioning and Oral Exercises
20% Portfolio Journal for work exercises
20% Formative Examination (One online/Offline written quiz covering this specific topic)
40% Summative Examination (This topic is one of the topics included in the Online/Offline Written Examination)

VI. ASSIGNMENT/ AGREEMENT

Millan, Accounting for Special Transactions

2018e
Dayag, Advanced Financial Accounting and
Reporting 2019e
VII. REFERENCES
IFRS 15 Revenue from Contracts with
Customers
Dayag, Advanced Financial Accounting and
Reporting Reviewer

END OF CHAPTER 7