LONG TERM CONSTRUCTION CONTRACTS PFRS 15 P. A.

De Jesus

Problem 1: SMDC enters into a contract with Mr. Pol to build a building for P10,000,000
on January 2, 20x1 with performance bonus of P200,000 if the building is completed by
October 1, 20x1. The bonus is reduced by P10,000 for each week that completion of the
building is delayed. The entity usually includes the completion bonuses in the contracts
and, based on prior experience, estimated the following completion outcomes:

Completed by: Probability

Oct. 1 60%
Oct. 8 20%
Oct. 15 15%
Oct. 23 5%

The total transaction price of the contract is:

Problem 2: On January 2, 2030, DMCI Corp. contracted to building an office building

for Robinson Corp. for a total contract price of P11,800,000. Estimated total contract
costs are P10,400,000. Cost incurred to date related to the project are as follows:
a. Cost of direct materials used 800,000
b. Cost of direct labor, including supervision of P200,000 600,000
c. Cost of indirect materials used 220,000
d. Cost incurred in obtaining the contract previously written off 280,000
e. Depreciation of equipment used on the project 480,000
f. Payroll of design and technical department allocated to the contract 320,000
g. Insurance cost (1/3 for the project) 720,000
h. Research and development for which reimbursement is specified in
the contract 420,000
i. Depreciation of idle equipment not used on a particular contract 240,000
j. Selling costs 180,000
k. General and Administrative expenses specifically included under
the term of the contract 120,000
l. Borrowing cost incurred during the construction period 520,000
m. Advances made to subcontractors 400,000
Total 5,300,000

Using the cost to cost method, what is the realized gross profit to be recognized in year
2030?

Problem 3: On January 1, 2025, Entity A entered into a long term construction contract
to construct a building with initial contract price of P10,000,000. The outcome of the
construction can be estimated reliably and the contractor decided to employ the cost-to-
cost method. At contract inception, the customer makes an advance payment
(mobilization fee) of 10% of the contract price deductible from the first billing. Entity A
incurred P3,500,000 construction cost during 2025 and the estimated cost to complete
the building on December 31, 2025 is P5,250,000. On January 1, 2026, the entity billed
the customer for the work performed on the contract. On January 10, 2026, the customer
pays the bill subject to retention provision of 5%.

Requirement: Prepare the journal entries and compute the realized gross profit
Problem 4: On January 1, 2020, an entity entered into a long-term construction contract
with fixed contract price of P5,000,000. The entity billed its client as follows: 30% during
2020, 40% during 2021 and the remainder at the year of project completion. The following
data were provided by the cost accountant of the entity:

2020 2021 2022

Cumulative Cost incurred as of the end of
P2,200,000 P3,600,000 P4,800,000
the year
Estimated remaining cost to complete at the
P3,300,000 P900,000 -
end of the year

Requirements:
1. What is the excess of construction in progress over progress billings on December 31,
2020 under percentage of completion method?
2. What is the excess of construction in progress over progress billings on December 31,
2021 under cost recovery method?

Problem 5: DMCI Builders Inc. started work on three projects that are distinct. Any cost
incurred by the entity is recoverable. Data relating to the three projects are given below:

Estimated
Contract Cost cost to Contract
Price Incurred complete Billings
Project 1 1,250,000 937,500 - 1,250,000
Project 2 1,750,000 250,000 1,000,000 250,000
Project 3 625,000 250,000 250,000 375,000

Required: Compute the amount of construction in progress to be reported to be

reported on the statement of financial position using:

A. Percentage of Completion (cost-to-cost) method

B. Zero profit Method

Problem 6: On January 1, 2021, SMDC started the construction of a building with a fixed
contract price of P10,000,000. The outcome of the construction project can be estimated
reliably and the contractor decided to employ cost to cost method. The following data are
provided by the accountant and project manager concerning the construction costs for
the three years of construction:

Year 12/31/2021 12/31/2022 12/31/2023

Costs incurred during the year ? ? P3,740,000

Realized gross profit/(loss) during the
P750,000 (P250,000) (P800,000)
year
Percentage of completion as of the end of
37.5% 50% ?
the year

What is the balance of Construction in Progress on December 31, 2023?

Problem 7: DMCI 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 DMCI Company:

2021 2022 2023

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

Assuming the outcome of the construction can be estimated reliably and the company
decided to employ cost-to-cost method
Requirements: Compute the following
1. What is the amount of revenue from long-term contract for the year ended December
31, 2022?
2. What is the amount of Costs of construction for the year ended December 31, 2022?
3. What is the amount of Gross profit/(gross loss), respectively to be reported by DMCI
Company for the year ended December 31, 2022?