Long-term Construction Contract

Most of the time – long term construction contracts should be recognition overtime.

Based on the percentage of completion.

If problem is silent then use percentage of completion.

Percentage of completion rate X Contract Price = Amount of recognized revenue

PAS 11: Construction Contract

The entity determines for each distinct performance obligation whether it will be satisfied at a point in
time or over time; revenue is satisfied in a manner the corresponding performance obligation is
satisfied.

There are two basic methods:

1. Cost recover method (zero-profit method) – used when dependable estimates are unavailable,
causing doubts over the forecasts. Under this method, no gross profit is recognized until
completion by recognizing revenue up to the amount of recoverable costs during the period of
construction.

Example:

20X1 20X2 20X3 Total

Revenue in current year 1,512,00 2,520,000 1,568,000 5,600,000

Cost in the current year (1,512,000) (2,520,000) (504,000) (4,536,000)

Gross Profit in the current year 0 0 1,064,000 1,064,000

2. Percentage of Completion (Cost to Cost Method)

The % of completion (to-date) is computed as follows:

(a) % = Actual cost-to-date

Total estimated Cost (TEC)
(b) % = Revenue earned to date
Contract Price
How to recognize GROSS PROFIT and GROSS LOSS:

1.) % of Completion

Gross Profit % of completion

Gross Loss 100%

2.) Zero profit

Gross Profit Last year: No Zero

Yes Entire Gross profit

Gross Loss 100%

Note: In answering, the first thing needed to do is to know if it is a gross profit or gross loss situation.

Every year-end, the following will recur:

Revenue earned to date (Contract Price X %) Px

Cost incurred to date (Total Estimated Cost X %) (x)

Profit realized to date (Total Estimated Profit X %) Px

Total Estimated Cost

1) Actual Cost
2) Estimated Cost to Complete

Percentage of completion rate:

a) Cost-to-Cost Method (If problem is silent, use this)

b) Survey of work performed
c) Physical Proportion
Problem 1:

Percentage of Completion and Total Estimated Profit

20X1 20X2 20X3

Contract Price 5,600,000 5,600,000 5,600,000

Cost incurred to date 1,512,000 4,032,000 4,536,000

Additional Cost to Complete 3,528,000 448,000 -

Total Estimated Cost (TEC) 5,040,000 4,480,000 4,536,000

Total Estimated Gross Profit (Loss) 560,000 1,120,000 1,064,000

Percentage of Completion 30% 90% 100%

To-date Recognized in Recognized

Previous Years (RPY) This Year (RTY)
Revenue 1,680,000 - 1,680,000

Cost 1,512,000 - 1,512,000

Gross Profit 168,000 - 168,000

Revenue 5,040,000 1,680,000 3,360,000

Cost 4,032,000 1,512,000 2,520,000

Gross Profit 1,008,000 168,000 840,000

Revenue 5,600,000 5,040,000 560,000

Cost 4,536,000 4,032,000 504,000

Gross Profit 1,064,000 1,008,000 56,000

Journal Entry:

CIP – Construction in Progress (Inventory Account)

This account comprises of:

 1. Actual Cost Day-to-Day
2. Gross Profit Realized for the Year

Progress Billings or CB and CIP Accounts are closed in the end of construction.

Financial Statement Presentation:

Asset: CIP Account

Liability: Progress Billings

Note: Present as net amount, whichever is higher.

CIP > PB : Contract Asset

CIP < PB : Contract Liability

CIP Computation:

%age of Completion Zero profit

Gross Profit ACTD + GPTD (based on rate) ACTD

Under cost to cost Contract Price x % rate

Gross Loss ACTD – Gross Loss (100%) ACTD – Gross Loss (100%)