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1. AA Co. enters into a construction contract with a customer. PFRS 15 requires AA to do all of the following
at contract inception, except
a. assess the customer’s ability and intention to pay the contract price on due date.
b. assess whether the promised goods and services in the contract are individually distinct.
c. determine if the performance obligation(s) identified in the contract is(are) satisfied over time or at a
point in time.
d. estimate the total construction costs at completion.

2. “Step 2” of the revenue recognition principles of PFRS 15 requires an entity to identify the performance
obligations in the contract at the inception of the contract. Which of the following statements is not
correct regarding this step?
a. An entity shall treat each promise in the contract to transfer a distinct good or service as a separate
performance obligation.
b. An entity shall treat a promise to transfer a distinct bundle of goods or services as a separate
performance obligation.
c. An entity shall treat a promise to transfer a series of distinct goods or services that are substantially the
same and have the same pattern of transfer to the customer as a separate performance obligation.
d. An entity shall treat all promises in a single contract as a single performance obligation regardless of
the nature of those promises, if those promises are negotiated with the customer as a single
package.

3. A construction contract may be

a. a fixed price contract
b. a cost plus contract.
c. a combination of a and b
d. any of these

Use the following information for the next three questions:

In 20x1, AA Co. enters into a construction contract with a customer. The transaction price in the contract is
₱1,200,000. At contract inception, AA Co. estimates a total contract cost of ₱944,000. The actual costs
incurred in 20x1 are ₱590,000. The estimated cost to complete on December 31, 20x1 is ₱410,000. Progress
billings during the year amount to ₱70,000, ₱60,000 of which is collected.

4. At contract inception, AA Co. determines that its performance obligation in the contract is a single
performance obligation that is satisfied over time. AA Co. uses the cost-to-cost method to measure its
progress in the contract. How much is the profit recognized in 20x1?
a. 118,000 c. 122,000
b. 120,800 d. 132,200

Total contract price 1,200,000

(a) Costs incurred to date 590,000
Estimated costs to complete (given) 410,000
(b) Estimated total contract costs 1,000,000
Expected profit (loss) 200,000
Multiply by: % of completion (a) ÷ (b) 59%
Profit (loss) to date 118,000
Profit recognized in prior years -
Profit (loss) for the year 118,000

5. AA Co.’s performance obligation in the contract is satisfied over time. However, the outcome of the
performance obligation cannot be measured reasonably but contract costs incurred are recoverable. How
much is the revenue recognized in 20x1?
a. 708,000
b. 590,000
c. 118,000
d. 0

equal to the costs incurred during the year

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6. AA Co.’s performance obligation in the contract is satisfied at a point in time, i.e., when the construction is
completed and control over the promised good is transferred to the customer. How much is the revenue
recognized in 20x1?
a. 708,000
b. 590,000
c. 1,200,000
d. 0

no revenue is recognized until the project is completed and turned over to the customer

7. AA Construction Co. entered into an ₱80M fixed price contract for the construction of a private road for
BB, Inc. The performance obligation on the contract is satisfied over time. AA measures its progress on the
contract using the “cost-to-cost” method. The estimated total contract cost is ₱40M. AA incurred the
following costs in the first year of the construction:

Costs of negotiating the contract (charged immediately as expense) 400,000

Costs of materials used in construction 12,000,000
Costs of materials purchased but not yet used in construction 2,000,000
Site labor costs 4,000,000
Site supervision costs 800,000
Depreciation of equipment used in construction 480,000
Depreciation of idle equipment not used in the contract 240,000
Costs of moving equipment and materials to and from the construction site 160,000
Costs of hiring equipment 560,000
Advance payment to subcontractor (the subcontracted work is not yet
started) 80,000

How much revenue is recognized in the first year of the contract?

a. 46M
b. 45M
c. 36M
d. 25M

Costs of materials used in construction 12,000,000

Site labor costs 4,000,000
Site supervision costs 800,000
Depreciation of equipment used in construction 480,000
Costs of moving equipment and materials 160,000
Costs of hiring equipment 560,000
Contract costs incurred to date 18,000,000
Divide by: Estimated total contract costs 40,000,000
Percentage of completion 45%
Multiply by: Contract price 80,000,000
Revenue in first year 36,000,000

Use the following information for the next two questions:

On July 1, 20x1, Contractor Co. enters into a contract with a customer for the construction of a building. At
contract inception, Contractor Co. assesses the contract in accordance with the principles of PFRS 15 and
concludes that it has a single performance obligation that is satisfied over time. Contractor Co. then
determines that the appropriate measure of its progress on the contract is input method based on costs
incurred. Information on the contract is shown below:

Contract price 600,000

Contract costs incurred during 20x1 120,000
Estimated remaining costs as of Dec. 31, 20x1 240,000
Billings to the customer during 20x1 180,000
Collections on billings during 20x1 60,000

8. What amount of revenue is recognized on the contract in 20x1?

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a. 180,000
b. 200,000
c. 220,000
d. 240,000

Total contract price 600,000

Multiply by: Percentage of completion (a) 33 1/3%
Revenue to date 200,000
Less: Revenue recognized in previous yrs. -
Revenue for the year 200,000

(a)
Costs incurred to date (1) 120,000
Estimated costs to complete 240,000
Estimated total contract costs (2) 360,000
Percentage of completion (1) ÷ (2) 33 1/3%

9. What amounts are presented in Contractor Co’s. statement of financial position under <List A: Traditional
accounting> and <List B: PFRS 15>?
Gross amount due from (to) cust. Contract asset(liability)
a. (20,000) (20,000)
b. 20,000 20,000
c. 20,000 (20,000)
d. (40,000) (40,000)

 Traditional accounting:
Construction in progress
Costs
incurred 120,000
Gross profit (b) 80,000
12/31/x1 200,000

(b)
Revenue for the year (see previous solution) 200,000

Cost incurred during 20x1 (120,000)

Gross profit - 20x1 80,000

Construction in progress 200,000

Progress billing 180,000

Gross amount due from customer 20,000

 PFRS 15:
Contract liability
180,000 Progress billing
Revenue in 20x1 (see prev. sol.) 200,000
Debit balance - Asset 20,000

10. In 20x1, Silverchair Co., a construction company, enters into a contract with a customer for the
construction of a building. The contract states a fixed fee of ₱8,700,000. Silverchair’s performance
obligation in the contract is satisfied over time. Silverchair uses the ‘cost-to-cost’ method in measuring its
progress in the contract. Information on the contract follows:

20x1 20x2
Estimated total costs at completion 6,525,000 6,960,000
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Percentage of completion 15% 65%

How much is the profit recognized in 20x2?

a. 804,750
b. 840,750
c. 978,750
d. 1,131,000

20x1 20x2
Contract price 8,700,000 8,700,000
Estimated total costs at completion (6,525,000) (6,960,000)
Expected total gross profit 2,175,000 1,740,000
Percentage of completion 15% 65%
Profit to date 326,250 1,131,000
Profit in prior yr. (326,250)
Profit for the yr. 326,250 804,750

Use the following information for the next two questions:

In 20x1, Gorgeous Too Co. enters into a fixed-price construction contract with a customer. At contract
inception, Gorgeous Too Co. assesses its performance obligations in the contract and concludes that it has a
single performance obligation that is satisfied over time. Gorgeous Too Co. determines that the measure of
progress that best depicts its performance on the contract is input method based on costs incurred.

Information on the contract follows:

20x1 20x2
Cumulative contract costs incurred 2,250,000 4,800,000
Cumulative profits recognized 750,000 1,200,000
Progress billings 2,400,000 3,600,000
Collections on progress billings 2,000,000 4,000,000

The contract is completed in 20x2.

11. What amount of revenue is recognized in 20x2?

a. 2,800,000
b. 3,000,000
c. 4,800,000
d. 6,000,000

Step 1: Pro-forma computation

20x1 20x2
Revenue to date ? ?
Contract costs incurred to date (2,250,000) (4,800,000)
Profit to date 750,000 1,200,000
Profit in previous years - (750,000)
Profit for the year ? ?

Step 2: ‘Squeeze’ for the missing information

20x1 20x2
Revenue to date 3,000,000 6,000,000
Contract costs incurred to date (2,250,000) (4,800,000)
Profit to date 750,000 1,200,000
Profit in previous years - (750,000)
Profit for the year 750,000 450,000

Step 3: Compute for the requirement

Revenue to date in
20x2 6,000,000
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Revenue to date in
20x1 (3,000,000)
Revenue in 20x2 3,000,000

12. How much is the transaction price in the contract?

a. 5,000,000
b. 6,000,000
c. 7,000,000
d. 9,000,000

Since the contract is 100% complete in 20x2, the transaction price must be equal to the ‘revenue to date in
20x2’ of ₱6,000,000 (see previous solution).

Use the following information for the next two questions:

In 20x1, ABC Co. was contracted to build a railroad. The contract price is equal to the construction costs
incurred plus 20% thereof. However, if the project is completed within 4 years, ABC will receive an additional
payment of ₱200,000. Information on the project is shown below:
20x1 20x2 20x3
Costs incurred to date 2,400,000 4,575,000 6,125,000
Estimated costs to complete 3,600,000 1,525,000 125,000

In 20x1 and 20x2, it was not highly probable that the project will be completed on time. However, in 20x3,
ABC assessed that the project will be completed earlier than originally expected and thus it is now highly
probable that the incentive payment will be received.

13. How much revenue is recognized on the contract in 20x3?

a. 2,610,000
b. 2,595,000
c. 2,056,000
d. 2,022,000

20x1 20x2 20x3

Costs incurred to date (a) 2,400,000 4,575,000 6,125,000
Estimated costs to complete 3,600,000 1,525,000 125,000
Estimated total contract costs (b) 6,000,000 6,100,000 6,250,000
Multiply by: Cost + Var. fee 120% 120% 120%
Total 7,200,000 7,320,000 7,500,000
Incentive payment 200,000
Estimated total contract price 7,200,000 7,320,000 7,700,000
Multiply by: % of completion (a) ÷ (b) 40% 75% 98%
Revenue to date 2,880,000 5,490,000 7,546,000
Less: Revenue in prior yrs. - (2,880,000) (5,490,000)
Revenue for the year 2,880,000 2,610,000 2,056,000
Cost of construction (1) (2,400,000) (2,175,000) (1,550,000)
Gross profit for the year 480,000 435,000 506,000

(1)
The costs incurred each year are computed as follows:
20x1: 2.4M costs incurred to date – 0 costs incurred in previous yrs. = 2.4M
20x2: 4.575M – 2.4M = 2.175M
20x3: 6.125M – 4.575 = 1.55M

14. How much profit is recognized on the contract in 20x3?

a. 506,000
b. 595,000
c. 603,000
d. 634,000

see solution in preceding question

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Use the following information for the next two questions:

In 20x1, Salamagi Co. entered into a contract with a customer. The contract stipulates the following:
 Contract price of ₱20,000,000
 5% mobilization fee due upon signing of the contract, to be deducted from the final billing
 10% customer retention on all subsequent progress billings, to be paid to Salamagi on completion of the
project

Salamagi Co. estimated a ₱5,000,000 gross profit from the project. The percentage of completion method will
be used. In 20x1, Salamagi billed the customer for 50% completion of the project. The customer accepted all
the billings, except one for 10% which was accepted on January of the following year. All the accepted billings
were collected during the year except an 8% billing which was due January of the following year.

15. What is the amount of profit recognized from the contract in 20x1?
a. 2,500,000 c. 2,720,000
b. 2,650,000 d. 2,900,000

20x1
Expected gross profit (given) 5,000,000
Multiply by: % of completion (given) 50.00%
Profit to date 2,500,000
Profit in previous years -
Profit for the year 2,500,000

16. What is the total amount of collections from the billings in 20x1?
a. 5,760,000 c. 6,760,000
b. 6,400,000 d. 7,400,000

Collection from mobilization fee (20M x 5%) 1,000,000

Unadjusted progress billings (20M x 50%) 10,000,000

Billing not accepted in 20x1 (20M x 10%) (2,000,000)
Billing due in the following yr. (20M x 8%) (1,600,000)
Adjusted progress billings 6,400,000
Multiply by: (100% - 10% retention) 90%
Collections from progress billings 5,760,000
Total collections in 20x1 6,760,000

Use the following information for the next two questions:

In November 20X2, an entity contracts with a customer to refurbish a 3-storey building and install new
elevators for a total consideration of ₱5,000,000. The promised refurbishment service, including the
installation of elevators, is a single performance obligation satisfied over time. Total expected costs are
₱4,000,000, including ₱1,500,000 for the elevators. The entity determines that it acts as a principal because it
obtains control of the elevators before they are transferred to the customer.

A summary of the transaction price and expected costs is as follows:

Transaction price ₱5,000,000

Expected costs:
Elevators ₱1,500,000
Other costs 2,500,000
Total expected costs ₱4,000,000

The entity uses an input method based on costs incurred to measure its progress towards complete
satisfaction of the performance obligation. The customer obtains control of the elevators when they are
delivered to the site in December 20X2, although the elevators will not be installed until June 20X3. The costs
to procure the elevators are significant relative to the total expected costs to completely satisfy the
performance obligation. The entity is not involved in designing or manufacturing the elevators.

As of December 31, 20X2, the entity has incurred total costs of ₱500,000, excluding the cost of the elevators.
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17. How much revenue is recognized in 20X2?

a. 1,000,000 c. 2,500,000
b. 2,200,000 d. 0

Control over the elevators is already transferred to the customer (as stated in the problem). However, the
incurrence of the cost of the elevators does not properly reflect the percentage of completion of the contract
because the elevators are not yet installed. Accordingly, the entity shall adjust its measure of progress to
recognize revenue only to the extent of the costs of the uninstalled elevators. The cost of goods sold
recognized in 20X2 will also include this cost. As a result, the entity recognizes zero profit from the elevators
in 20X2.

Percentage of completion = (500,000 costs incurred, excluding cost of elevators) ÷ (2.5M ‘other costs’ only,
excluding costs of elevator)
Percentage of completion = 20%

[(5M transaction price – 1.5M cost of elevators) x 20%] + 1.5M cost of elevators = ₱2,200,000 revenue in 20X2

18. How much profit is recognized from the contract in 20X2?

a. 265,000 c. 200,000
b. 220,000 d. 0

Cost of goods sold in 20X2:

[(2.5M ‘other costs’ only, excluding the costs of elevators) x 20%] + 1.5M costs of elevators = ₱2,000,000 cost
of goods sold in 20X2

Profit in 20X2 = 2.2M revenue in 20x2 – 2M = ₱200,000

Or
(5M transaction price – 1.5M cost of elevator) x 20% = 700K revenue excluding elevator – 500K costs excluding
elevator = 200K

19. An entity, a construction company, enters into a contract to construct a commercial building for a
customer, on customer-owned land, for a promised consideration of ₱1 million and a bonus of ₱200,000 if
the building is completed within 24 months. The entity accounts for the promised bundle of goods and
services as a single performance obligation satisfied over time because the customer controls the building
during construction. At the inception of the contract, the entity expects the following:
Transaction price ₱1,000,000
Expected costs 700,000
Expected profit (30%) 300,000

At contract inception, the entity does not expect to receive the bonus because it cannot conclude that it is
highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur.
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 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.

Information as of the end of the first year is as follows:

Costs incurred to date ₱420,000
Total expected costs ₱700,000

The entity reassesses the variable consideration and concludes that the amount is still constrained.

In the first quarter of the second year, 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 ₱150,000 and
₱120,000, respectively. In addition, the allowable time for achieving the ₱200,000 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. In
assessing the contract modification, the entity concludes that the remaining goods and services to be provided
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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.

How much is the cumulative catch-up adjustment to revenue recognized on the date of contract modification?
(round-off percentage of completion to one decimal place only)
a. 89,200 c. 92,800
b. 91,200 d. 93,400

20x1 20x2
Original contract price 1,000,000 1,000,000
Bonus - 200,000
Contract modification 150,000
Total 1,000,000 1,350,000
Percentage of completion (a) 60% 51.20%
Revenue to date 600,000 691,200
Revenue in prior yr. (600,000)
Revenue for the year 600,000 91,200

(a)
20x1 20x2
Costs incurred to date 420,000 420,000
Total expected costs 700,000 820,000(b)
Percentage of completion 60% 51.20%

(b)
700,000 + 120,000 increase due to contract mod. = 820,000

20. ABC Co. started work on a construction contract in 20x1. The contract price is ₱10M. However, the
contractual agreement stipulates that if the cumulative inflation reaches or exceeds 26%, the contact price
shall be adjusted upwards by 10%. Additional information on the contract is shown below:
20x1 20x2
Costs incurred to date 2,400,000 4,500,000
Estimated costs to complete 3,600,000 1,500,000
Cumulative inflation rate 18% 27%

How much is the profit recognized in 20x2?

a. 1,890,000 c. 2,060,000
b. 1,980,000 d. 2,150,000

20x1 20x2
10,000,00 11,000,00
Total contract price 0 0 *
(a
) Costs incurred to date 2,400,000 4,500,000
Estimated costs to complete 3,600,000 1,500,000
(b Estimated total contract
) costs 6,000,000 6,000,000
Expected profit (loss) 4,000,000 5,000,000
Multiply by: % of completion
(a) ÷ (b) 40% 75%
Profit (loss) to date 1,600,000 3,750,000
Profit recognized in prior (1,600,000
years - )
Profit (loss) for the year 1,600,000 2,150,000

*10M initial contract price x 110%, including the cost escalation.