3 ICARE Accountancy Review pon Initvalive'+ Caanpict or we AFARO6 — 03 LONG TERM CONSTRUCTION CONTRACT - PFRS 15: REVENUE FROM CONTRACTS WITH CUSTOMERS TRUE OR FALSE 10, Companies recognize revenue only when a contract and performance obligations are reasonably likely to exist. Companies recognize revenue only when control over goods or services has been transferred from the seller to the customer. ‘A rationale for recognizing revenue over the life of contract rather than at a single point in time is that results are more conservative, and it results ina lower income tax ‘The Billings on Construction in Progress account isa contra — inventory account. The percentage — of ~ completion method of inventory valuation of long ~ term contracts recognize income based on the progress of work. ‘The percentage ~ of ~ completion violates the general rule on revenue recognition that the ‘earnings process is complete. ‘The theoretical support for using the percentage — of — completion method of recognizing revenue from long ~ term construction contracts is that it produces a realistic matching of expenses with revenues. Contract revenue in construction contract comprises the intial amount of revenue agreed in the contract, variation in contract work, claim and incentive payment Under PERS 15, if the Construction in Progress is higher than Progress Billings there should be recognition of account receivable At the end of the construction, Construction in Process is expected to be equal to Progress Billing. PROBLEM SOLVING Sophie Inc has entered into a very profitable fixed price contract for constructing a high ~ rise building over a period of three years. It incurs the following costs relating to the contract during. the first year: The Cost of material is P5,000,000, Site labor cost is P4,000,000, the agreed ‘administrative costs as per contract to be reimbursed by the customer is P2,000,000, depreciation of the plant used for the construction is P1,000,000, Marketing cost for selling apartments when they are ready is P2,000,000 and the total estimated cost of the project is P36,000,000,3 ICARE Accountancy Review Initvalive'+ Caanpict 1. The percentage of completion of this contract at year ~ end is, Trisha Corp. is constructing a building and has signed a total estimated cost of P10,414,020. It has incurred the following cost relating to the contract by the end of first year Costs of design and technical assistance that is directly related to the contract P133,500 Costs of design and technical assistance that are not directly related to the contract: (properiy allocated) 25,500 Insurance costs during construction 12,400 ‘Administrative costs expected to be reimbursed in accordance with contractual agreement 80,000 Cost of negotiating the contract (charged immediately as expense) 87,500 Materials used in construction 2,494,485, Cost of materials purchased by not yet used in construction 490,000, Labor costs, 800,000 Site supervision costs 150,000 Depreciation of equipment used in construction. 80,000 Depreciation of idle equipment not used in the contract, 67,891 Cost of moving plant, equipment and materials, to and from the contract site 35,668 Cost of hiring plant and equipment 186,555 Marketing 50,000 Borrowing cost 100,000 Incidental income from the sale of serap materials 20,000 2. What is the percentage of completion? ‘A contractor enters into a contract to design and build an airport terminal, The contractor is responsible for the design and overall management of the project build, including engineering, site clearance, foundation, procurement, construction of terminal space, gates with loading bridges, customs and immigration, airline office space, distribution systems required for its operations, and installation of equipment and finishing, 3. How many distinct performance obligations are in the contract? ‘Assume the same fact pattern as above, except the contract requires the contractor to procure specialized equipment from a subcontractor and integrate the equipment into the airport terminal. The contractor expects to transfer control of the equipment approximately one year from the contract inception, The installation and integration of the equipment continue throughout the contract© ICARE Accountancy Review Sone We Innovative * Competent « 4, How many distinct performance obligations are in the contract? ‘Assume the same fact pattern as above and at contract Inception the contractor estimates the following: Contract price: P100 million Contract costs: P50 million Cost of the specialized equipment: P20 milion. During the first six months, the contractor incurs P45 million of costs including specialized equipment. 5. Using input measure, what isthe percentage of completion? 6. How much isthe revenue upon transfer of control ofthe specialized equipment? 7. How much is the cost upon transfer of control ofthe specialized equipment? 8. How much is the realized gross profit at the end ofthe year? Construction company IZZA signs a contract in June 2031 to refurbish a building and install new windows. Total contract price is P12 million. Total expected contract costs are: ‘+ P.6 mil. for windows (purchased from external suppliers); ‘+ P-4 mil. for labor, materials and other costs related to the project. ‘As of 31 December 2031: + IZ2A handed over windows to the client, although the installation has not been completed, However, the client obtained control of windows. +Other costs incurred to 31 December were P 1 mil Just before the year-end, the client paid the first progress payment of P 8 mil. The company uses input measure to recognize revenve. 9. What is the percentage of completion? 10, How much is the total revenue at the end of 31 December 2031? 11, How much is the total contract revenue? The company signed a 1,600,000 contract to build an environmentally friendly access trail to Baras, Rizal. The project was expected to take approximately 3 years. The following information was collected for each year of the project- year 1, year 2, and year 3: Costexpended | Expected | Support | Additional | Trailfeet | Additional trail during the year | additional | timbers | support | constructed | feet tobe cost to laid | timbers to | during the year | constructed completion | during | be laid the year Yeari | 200,000 300,000 3007 7700 6,000 30,400 Year2 | 300,000 360,000 600) 1,040 15,000 16,400 Year3 | 500,000 7,000 16,000© ICARE Accountancy Review or We Innovative * Competent « 12. Compute the amount of revenue to be recognized in year 3, assume that the company ‘employs the effort expended method of estimating percentage of completion and the ‘company measures its progress by the number of support timbers laid in trail 413, Using the same information in No. 12, compute the amount of revenue to be recognized in year 3, assume that the company employs an output measure, and the company measures its progress by the number of trail feet that have been completed: On January 1, 2029, Storm Company accepted a long-term construction project for an initial contract price of P3,500,000 to be completed on June 30, 2030. A mobilization fee of P300,000 is paid to Storm Company on January 1, 2029 and this Is to be charged against first billing. On. January 1, 2030, the contract price was increased to P4,500,000 by reason of change in the design of the project. The outcome of the construction contract can be estimated reliably. Storm bills the client based on the work performed towards the completion. The company collects the billings at the end of each year, net of 10 percent contract retention. The entity provided the following data concerning the direct costs related to the said project for 2029 and 2030: 2029 2030 Costs during the year 1,320,000 2,040,000 Remaining estimated costs to complete at year- 1,980,000 840,000 end 114, What is the realized gross profit or loss for the year ended December 31, 2030? 15. What is the balance of construction in progress on December 31, 2030? 16. If the outcome cannot be estimated reliability, how much is the rei loss for the year ended December 31, 2030? ized gross profit or 17. f the contract price for 2029 is P3,200,00 and the outcome can be estimated reliably, how much is the construction in progress at end of Dec 31, 20297 18.1f the contract price for 2029 is P3,200,00 and the outcome cannot be estimated reliably, how much is the construction in progress at end of Dec 31, 20297 ‘On January 1, 2028, Psalm Company started the construction of a building at a fixed contract price of P3,000,000. On the same date, the customer paid a mobilization fee ‘equal to 5% of contract price that will be deductible from the first billing, The outcome of construction contract cannot be estimated reliably During 2028, the entity billed the customer equivalent to 30% of the contract price. During 2029, the entity billed again the customer amounting to 20% of the contract, price. During 2030, the entity billed again the customer amounting to 40% of the contract price. The remaining billing was made at the year of completion of the project.» ICARE Accountancy Review Es Innovative * Compstent » Responsive The entity made collection from the customer at the end of 2028, 2029 and 2030, in the amount of P360,000, P1,350,000 and P540,000, respectively. The entity provided the following data concerning the direct costs related to the said project: 2028 2029 2030 Cumulative costs incurred at year-end 1,080,000 2,400,000 2,610,000 Remaining estimated costs to complete at 2,520,000 750,000 150,000 year-end 19, What Is the realized gross profit for the year ended December 31, 20297 20.What is the excess of construction in progress over progress billings or excess of progress billings over construction in progress on December 31, 20307 24, What is the balance of accounts receivable on December 31, 20307 22. Using percentage of completion, how much is the construction in progress at the end of 2028, 2029 and 20307 -end-ICARE Accountancy Review Innovative * Compétent » Responsive