Professional Documents
Culture Documents
AFAR-04 (Construction Accounting)
AFAR-04 (Construction Accounting)
If criteria mentioned above is not met, revenue should be recognized at a point in time (the company
recognizes gross profit when the contract is completed) referred to as the cost-recovery (zero-profit)
method/POINT in TIME. This method recognizes revenue only to the extent of costs incurred that are
expected to be recoverable. Only after all costs are incurred when gross profit will be recognized.
The performance obligation is satisfied when control of the goods or services is transferred from the
seller to the customer.
Usually transfer of control is obvious, and coincides with delivery.
Other indicators of transfer of control, the customer has (PAROL):
1. An obligation to pay the seller.
2. Legal title to the asset.
3. Physical possession of the asset.
4. Assumed the risks and rewards of ownership.
5. Accepted the asset.
The indicators (No. 1 to 5 as mentioned above) indicates that control has been transferred from the seller to the
customer (the customer is more likely to control a good or service if the customer has those indicators).
Sellers should evaluate these indicators individually and in combination to decide whether control has been
transferred and revenue can be recognized.
Under PFRS 15, the loss in Current Period on a Profitable Contract and Loss on an Unprofitable Contract are
similarly accounted for.
Profitable Contract – Loss in Current Period. This situation happens when, during the construction, there is a
significant increase in the estimated total contract costs but the increase does not eliminate all profits on
the contract.
I – Performance Obligations
1. Inting Corporation constructs highly specialized communication satellites. A customer in Hong Kong
recently placed an order for a cable TV satellite at a price of P20 million. The order was placed in April
20x6, and the satellite is to be delivered in one year. The customer has guaranteed to pay in full at the
end of 20x6, regardless of progress or cancellation. Inting uses “proportion of time” as its measure of
progress toward completion. When should Inting recognize revenue: at completion, or as the
construction is performed?
a. Over time c. No revenue recognized
b. Point in time d. No performance obligation
2. DJD Construction is constructing a building for Hotel Dian. Under the construction agreement, if for any
reason DJD can’t complete construction, Hotel Dian would own the partially completed building and
could hire another construction company to complete the job. When should DJD recognize revenue:
as the building is constructed, or after construction is completed?
a. Over time c. No revenue recognized
b. Point in time d. No performance obligation
3. Crown Construction Company entered into a contract with Star Hotel for building a highly sophisticated,
customized conference room to be completed for a fixed price of P400,000. Nonrefundable progress
payments are made on a monthly basis for work completed during the month. Legal title to the
conference room equipment is held by Crown until the end of the construction project, but if the
contract is terminated before the conference room is finished, Star retains the partially completed job
and must pay for any work completed to date. When should revenue be recognized?
a. No transaction c. Point in Time
b. No revenue d. Over Time
4. Regent Company entered into a contract with Star Hotel for constructing and installing a standard
designed gym for a fixed price of P400,000. Nonrefundable progress payments are made on a monthly
basis for work completed during the month. Legal title to the gym passes to Star upon completion of the
building process. If Star cancels the contract before the gym construction is completed, Regent removes
all the installed equipment and Star must compensate Regent for any loss of profit on sale of the gym to
another customer. When should Silica recognize revenue?
a. No transaction c. Point in Time
b. No revenue d. Over Time
During 2020 the customer agrees to a variation with increases expected revenue from the contract by
P10,000 and causes additional costs of P5,000. At the end of 2020 there are materials stored on site for use
during the following period (2021) which cost P4,000*.
20x4 20x5
Costs incurred to date . . . . . . . . . . P4,920,000 P8,640,000
Estimated costs to complete . . . . 4,920,000 2,160,000
Billings made to date . . . . . . . . . . . 5,280,000 8,700,000
Collections made to date . . . . . . . 4,920,000 8,700,000
Compute the amount of construction in progress (net)/contract assets or progress billings (net)/contract
liabilities for the year 20x5:
Percentage-of-completion Cost Recovery Method
Method (Over Time) of Construction Accounting (Point In Time)
a. P780,000 -- liabilities P 780,000 – liabilities
b. 780,000 – assets 780,000 – assets
c. 60,000 – liabilities 60,000 – liabilities
d. 636,000 – liabilities 636,000 – liabilities
By December 31, 2019, three-quarters of the bridge was completed which was estimated by the
company’s engineering department; whereupon the third billing was made (cash had been made on the
previous two billings).
During 2019, a total of P8,400,000 had been paid for costs incurred, and total liability for construction
materials purchased still amounted to P2,000,000. It is estimated that an additional P3,600,000 would be
required to complete the construction of the bridge.
Because the information is incomplete, you are asked the following questions assuming the percentage-
of-completion method is used; an output measure (sales basis) is used to estimate the percentage
completed, and revenue is recorded using the actual cost approach.
1. How much gross profit should be reported in 2019?
2. How much revenue should be reported in 2020?
3. How much revenue should be reported in 2021?
4. How much cost was incurred in 2021?
5. The total costs of the contract?
6. What would be the construction revenue, costs of revenue and gross profit for 2019 and 2020
assuming that in 2019, the outcome of the construction contract cannot be estimated reliably (no
estimated cost to complete). (Ignore the revenue amount shown for 2019 and gross profit amount
reported for 2020.)
7. What would be the gross profit for 2020 if the cost-to-cost percentage-of-completion method/input
method (cost basis) were used rather than the output measure assuming that the estimated cost
to complete in 2019 amounted to P450,000? (Ignore the revenue amount shown for 2019 and gross
profit amount reported for 2020.)
*The only thing that stands between a man and what he wants from life is often merely the will to try it
and the faith to believe that it is possible.*
*Don’t be afraid of shortcomings, because they are what will make you better. Stay on the right track,
Continue to pray and things will work out for you.*
*It is better to fail in doing something, than to excel in doing nothing.*
*For even a flawed diamond is more valuable than a perfect brick. And people who have no failures also
have few victories.*
*Sometimes a winner is just a dreamer who never gave up.*
*The spirit, the will to win, and the will to excel are the things that endure.*
*These qualities are so much important than the events that occur.*
*A dream unrealized is a dream imprisoned by that enemy of all enemies, the fear of failure.
Set that dream free by determining that you will make it happen.*
*Don’t let your learning lead to knowledge; let your learning lead to action.*
*Every great success was, at the beginning impossible*
*The secret of life is not just to live, but to have something worthwhile to live for.*
*Great achievements are not done by strength but by perseverance*
*No one knows what he can do until he tries*
*Not knowing when the dawn will come, I open every door*
*The great thing in the world is not so much where you are but in what direction you are going*
*No act of kindness, no matter how small is ever wasted.*
*One individual plus courage is a majority.*
*Never take direction from a crowd for your personal life.*
*And never choose to quit just because somebody disagrees with you*
*There is no great and no small
To the Soul that makes it all:
And where it comes, all things are equal;
And it comes everywhere.*
2021
Revenue (P510,000 x 100%) 510,000 377,400 132,600
Cost (P392,500 x 100%) 392,500 296,000 ***96,500
Gross Profit (P117,500 x 100%) 117,500 81,400 36,100
2020
Revenue (equivalent to Costs Incurred) 296,000 140,000 156,000
Cost 296,000 140,000 156,000
Gross Profit -0- -0- -0-
2021
Revenue 510,000 296,000 214,000
Cost 392,500 296,000 96,500
Gross Profit 117,500 -0- 117,500
Problem IV – PJD Construction
2019
Contract Price 4,000,000
Cost Incurred Each Year
+: Cost Incurred in Prior Years
Cost Incurred to Date
+: Estimated Cost to Complete
Total Estimated Cost
Estimated Gross Profit
X: Percentage of Completion (CI to date/TEC)
Recognized Gross Profit to Date
Less: Recognized Gross Profit in Prior Yr(s)
RGP (L) Each Year - % of Completion Method
Problem V – DJ Builders
2019 2020 2021
Contract Price 2,000,000 2,000,000 2,000,000
Cost Incurred Each Year 360,000 ? 820,000
+: Cost Incurred in Prior Years _____0__ _______ _______
Cost Incurred to Date 360,000
+: Estimated Cost to Complete _______ ? _______
Total Estimated Cost _______ _______ _______
Estimated Gross Profit ?
X: Percentage of Completion (CI to date/TEC) ?
Recognized Gross Profit to Date _______ _______ _______
Less: Recognized Gross Profit in Prior Yr(s) _______ _______ _______
RGP (L) Each Year - % of Completion Method 40,000 140,000 (20,000)
2019
Revenue
Cost
Gross Profit
2019
Revenue
Cost
Gross Profit
Problem VIII Requirement 6 Requirement 7
- Cost Recovery - % of Completion
2019 2020 2019 2020
Contract Price _______ _______ _______ _______
Cost Incurred Each Year
+: Cost Incurred in Prior Years _______ _______ _______ _______
Cost (actual) Incurred to Date _______ _______ _______ _______
+: Estimated Cost to Complete
Total Estimated Cost _______ _______ _______ _______
Estimated Gross Profit _______ _______ _______ _______
x: Percentage of Completion (CI to date/TEC)
Recognized Gross Profit to Date
Less: Recognized Gross Profit in Prior Yr(s) _______ _______ _______ _______
RGP Each Year _______ _______ _______ _______
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Whatever is expressed is impressed. Whatever you say to yourself, with emotion, generates thoughts, ideas and behaviors consistent with those words
Be not afraid of life. Believe that life is worth living and your belief will help create the fact.
Develop an attitude of gratitude, and give thanks for everything that happens to you, knowing that every step forward is a step toward achieving something
bigger and better than your current situation.
The remarkable thing we have is a choice every day regarding the attitude we will embrace for that day. We cannot change our past... We cannot change the
fact that people will act in a certain way. We cannot change the inevitable. The only thing we can do is play on the one string we have, and that is our
attitude.
Attitude is more important than the past, than education, than money, than circumstances, than what people do or say.
It is more important than appearance, giftedness, or skill.
The only way to find the limits of the possible is by going beyond them to the impossible.
Nothing great will ever be achieved without great mean, and men are great only if they are determined to be so.