Chapter 12 CONSTRUCTION CONTRACTS introduction pas U1 shall be applied in accounting for construct catements of contractors. The objective of this. san scouting treatment of revenue and costs associated “with const Because of the nature of the activity undertaken in construction cat ie den which the contract activity is entered into and the date when the a niviy nocelans ssuly fall into different accounting periods. Therefore the pray teee aaa acetone gs nae ere aca er e tanac costs tothe accounting periods in which constriction weik is performed." ey contracts in financial lard is to prescribe the eye ere — ype sys — =a CONSTRUCTION CONTRACTS construction contract may be negotiated for the construction of « single asset such bridge, building, dam, pipeline, road, ship or tunnel, A construction may 39 deal With the construction of a number of assets which are closely interrelated or interdependent in terms of their design, technology and function or their ultimate hose for the construction of i ates oF Pupose or use. Examples of such contracts include tl m rst teneies and other complex pieces of plant and equipment, Consration cose tof ¢ formulated in a number of ways which are classified as: ) be 1. Fixed Price Contract Itis a construction contract in Price, or a fixed rate per unit Cost escalation clauses. contract sontractor agrees a fixed subject 0 which the some cases ‘of output, which in s is reimbursed for vamage of these costs oT Cost Plus Contract tractor jchy the contra in which the cor tract plus a perc Wis a construction con sts. allowable or otherwise defined © fixed fee.sarin, conmnNG AND SEGMENTING CONSTRUCTION CONTRACT, ——— erepinge ot ns Seco waply te mass eeerr eee ema xoa ep of COMERS 38.00 IM erder refer ge Fier be commat rs gren of eons et ‘Seqrenting Coaseractivn Coetract wae scorns covers ie comsrction of number af #585 the contre or SEEESINiicoes er salle censured 2 separate contract when. 1 Sepurte propos have heen sibmitted for each asset 2 Each aserhas been sbjet 0 spate segotiaton and both cntacnn se comer nev oe 2D. FTL hat pat oF the Comat selon 3. The com and ever of sch asset ae separately igeatifiable ‘Combining Construction Contract A groepof sntst, ether with a ingle customer ot with several customers, tll be bened as ase constuction contrat when: The group of conzact i negotiated as one single package, 2. The comnts aso chsely iotoelated that they arc efectively part of single pojest with a overall profit margin. 3. The contracts ae performed concurrently on a comtinuous seine CONTRACT REVENUE, Contract revenue js measured at the fit value of the consideration rxcivsl & recenahle The measurement of contract revenue is affected by 2 vary mcrraitis tht depend onthe outcome of fature events. The estimates en =) {oe feiss events occur and uncertainties are resolved. Therefore, the amu ‘coms reve may increase or decrease ftom one perio to the nex" Revision of estimates ef Sc creepy oe rare ae ace Seah soca we suet abana wc 4 Dapeciin on ile plan an ea be ated MBASURING THE PERCENTAGE OF COMPLETION orm er emo met my t rori inchaded as part of the contract costs if ean be separately identifi = Sn Soe celery Sa Fee thdaetcronpin a ered ranean SS (ican ae neat ri under the percentage of compen meta Thy coal erat ee es ey apt Measures apt menses are made in relation tthe ons flo devte ws om Thy (Ste on an established oe assumed vloship etc a tf nm frosty. They include the widely wscdconncot mee. hed oe (Stsemed elaionhipbetwecn a unit of ipa and pany ‘RPCORENETIOW OF CONTRACTREVENUE AND EXPENSES, ‘Wher the ontcome of x merution contact can be estimated rly, ots vom ed cores cose wth the constestion contract shal mpi {= rene and eps respectively by reference tothe sage of compo ef onmex atvay a fe blane shot due, However, as the outcome of he ote ‘amet beim lly no profit is recognized. The following methods ox! ‘eam Gr npsem consrcion comet: Une teconto-ct method, the degree of cmpetion sees sent abeady incurred with the most resem eine of ample the projec. The percentage tha eons ncared beat pied tw be cape nt nce oe perm wren ta ae Tak cir revenue andlor prot beg the a fod eemiped by the folowing frm and Actual Cos to date Expected Revere eid inyer = Toalexpeced cot» profit = agreom at hel be 5 Pointed ot tht under he cto meth ok cn Spey ng cama cna con creda ty Mears iTiPLE CHOICE QUESTIONS Ja ade inom fest whe Ica in - nsw ml Se comet lens ech i ao Fac tay the ato ews pend 1 alcray ants in contract. © the aay 08 puis Consiision COE 3 conc bail gy ai epee on tf CONTRA rast for five years. Bo thle ile pages ar gerd ech ier Th esr ag tone Combined and treated a5 single evan, Sp ere reer ee [ici aa ond arc ee nse oe a te red lhe pet compl o apn sa Recognized under the completed enret aha eeepc themamoe che tioe hates ease Pj Meee ae ates the ects stage of completion. and the maintenance contract ander the pecemase sf conpenay Se oy ator The Hogbean Co. is @ construction copay that has he flea cons 1. Project managers costs 2 Destruction ofan existing bildng 3. Restoration ofan old factor, According to onstruction Contracts which cos my hen ‘spi AS 11 c Sie ak {Gost (1) and cas (2) only & Coat (1) and cost (3) only ost (2) and cost (3) only Cost (1), 2), and 3) Mm. 123 eras) ORH of § constriction contract compris af the Flows Ae Con dict ge te peeses y 12 Consiriction Contras . ‘ete 13 -Crto Can 7 eras povan has carried out addi 2. Dow tional work on the, oem ea Sen ull son. Ti tM tg, coun te ena 00 te te need ae ot 10 Seatac cbt cso an Of be sve i : sie is hea in | EERE ST erst inteenitermeas ening 01451, Contruton Coase a men enn ee: » eBay ron 2404s eae Se eee Sopa one tainting, hk rn Serotec , cee oe fee Roeper etre 1 eee R08. 12-7 ERS) Azan 0 IAS, 11, Consrcion Cont, shoe bug cy ahn yan cal should be accounted os seoeee 4 Anitemof plant and machinery beng conte to esl inventory. 1 An office block bing const as an nest ope & warehouse being eontructed forte ein sees 4A larg boat beng constucted fra thi par ner psa oa oe egos conact int eae in centton cont compise 4 Tefal nou freene agreed inthe contact oly. pce. 2-4 GFR 3 arn cx wor clin nd incentive payment ony Tie Pace Coa conscton ampar. has Derm 31 ren ist bl i in mount of eens greed in the entat, variation ‘factory fora client and has schadled fs wok lo: utc work, chi ad incentive payment 4 Tet amount of revenue agred in the Contact and progress March20,2014 Cont to avail ad sig bigs. ‘Apeil25,2014_Consiucon wrk commence. [November 27,2014 Principal ensnetion wrt tobe competed PROB 1. 6cRRS) “December 30,2014 Final compan ofconr. cordance with 1AS 11, Consction Cone, th maimum expt ‘sod over which the cost atbuable tothe ont sould axeomalte i Mach 20,2014 to December 30,2016 ‘April 25,2014 to November 27, 2014 G_AP!125, 2014 to December 3,20 “March 2, 2014 to November 27,2014 manatee it eng compleon of constuction contrac. The woh ‘te plan death ate clined telone t ‘Ze let fas requested a variton inthe conti y sageie, ; Promeoae ist [© be fed at an ational cot Doone conte le bas acpi repay fr se ‘ew hog they werent orginally agreed.y i ron 1-945) hee 1 Comin Cnt hen robe at ae AS 1 ern il een al const ra lng Site i es pin ft cote ovat Mie abe, Se yt eay come de eApporioned tte years of the contract according to the stage of cmpletoe mead 4 Recngnad as an expense immediately PROB. 12 10(Adapted) ‘Aung comctor has contract construct args building is xine ‘athe bling wil uke 2 years to complete. Proges ilings wil beset tte camomer a query imerals. Which of the following descties ge ‘refeble pin for evenae recognition fr this contact? | Afr the coma signed. ‘As progres made toward completion of the contract, © Ascashireeie, 4 When the conta is completed. PROB. 12-11 (AICPA) Hon should te bales of prope bilngs and construction in props shown tering dis rir toe completo long nrc 4 Popes bling ws ered income, cnscton in props 8 sete exe Prope bling nce, conarctic in propest invent. © Neat cureat ae debi aune ad cet laity i eet bate 4 Ne aacome fom contucon frei balance and} sft ‘onan bce ee ye aaa _ i2as) ‘The Pg excel s payments and advance meson : Me on etng ros. 12-13 (ERS) eof te covaton tht te sit oe nee {arsction involving the rendering olen the ee ovasaction at the nd of he npg pn can aac Sent Which TWO ofthe Following mst fr deen he can ef contact involving the rendring wl sevacvan pons eee TAS 18, Revenus as being ascepab i? 1 Cost ncured to date a percentage ofthe enter 2. Advances received to date as. perso the a anne nee 3. Survey of work performed 4 Revenue to date divided fy al vont eee Methods and 2 1b Methods 1 and 3 © Methods | ad 4 4 Methods 3 and 4 PROB 12-14 AICPA) ‘ie cllultion of the income recogized ia the thi yet of 2 6 rtuction contact accounted for using the pci of cis ne aaa gama Aout for wing Tota costs incurred to date ttt estimated cos & Total coat incured to date ott bilings 0 te Costs incurred in year 3 to total estimated cost, (Conta incured in year 31 toa billings 1 it>— __ $i 2 = Conrcin, 2 Pron 12-15 (AICPA of co nt rein min Me ag Secreen on ee Trig Hem soak be ted 1 clue the incopy stereo? as none prvioty Progress billings to see oe . Ye Ye & ~ Ye « Ye in a Ne ba PROB 12-16 (AICPA) ‘A comune te pocentag of completion method 0 aout fy Genres cone. Wich ofthe folowing shouldbe wad be sme copied inthe ft yar? the cae Colleton on homes bing _progess tilings . = ‘Yes . ‘Yeu Ne . 7 No ie - Yes PROB. 12-17 (Adapt) ; He oo moaun) 4, Lym Co. beam constion xr December 31 204, on orca a ay 12216, nt would be th ee of pops MEP compen Tung of competion thd nl ek 21 age oe oie " pesenage ofcompletion Zao Pf ‘Noeffect fae . No fet Woes e Decrease Noete a Decrease Decese pos. 12-19 (AICPAY ‘wich of the following would be wed in te caclion of he none ‘in the third and final year of 2 contin coma whats ‘Teincd for using the perentgeof completion meta” Inne pei Comms pie Atala "Weg ss Yes 7 bos ve we Ye Ne i eee Ne Ye PROB. 12-20 QRS) The Tiger Co, hac entered into a Sear fined pric consrsto conto bd 1 factory. ‘The contract vale it 20,0000 and the exima! cnt we 16,000,000 At the end ofthe frst yea, Tiger can esate oan fe ‘omc reliably. thas received cash pyments 0th alae of PESO SE ‘cared cons of 6,000. At the end ofthe first yeas, wba ann Hols opined as. revenue in the financial stents soning 1 IAS Construction Contracts? i aamon. 12310785) ee come ot comiel# 490 TIL DH ag ae! : a 100.008 ata trot ‘00.000 te eno sone tele ceofmaciney S000 a wet ctl ots. asin OAS 1. Consetion Cone 23000 © [sono = 24000 4 Hones ‘PROB. 12-22(AICPA) ‘Cord Bites. In Ms consntely ued the percentage of completion ma of tecvenlng fo coercion ype courts. During 2014. Cord arte work on 5.00.00 fed prce constrain contract that wat complcted in 2016 Cas scouting ears closed the following How mech income would ied on this contract fr the yee tex Me Nd Cod have reogrized his const te ‘00.000 300.00 ‘000 Taa.000 are 1-33 (AICPA fon Co. ses the persentge of compl nat thee ketone acon fl comracted 0 bul an apainen oe Mf eng a e vf construction. In connection with the cone; 020% ome te poring OF Construction cost during. 2014. Mil pines Sh etre i ree m 208 Wh amt Su ae nao me ene 000 + Site S00 5 eenano on, 12-24 (AICPA) ‘te following data relate t0 a consretion jb saned by Wenhingn Ce ing 2014 Total contract price Poon ‘Acual costs incurred during 2015 ‘100 Eximaed remaining costs ran Billed to customer during 2014 Received from customer during 2014 Under the percentage of completion method, how much shell Worst ‘eupize as gross profit for 20147 ‘ ° & 40,000 $ t.000 109,900a ee roe. 12-25(ACP8) oniventy edhe PCENIBE of mpeg ca scoamcin Oe OU CA | aed work on a Pay rman me Oped Year The ASounng ean, fo mond SE ming or te P 1650.00 Progr tiie x Catcored 1.350.000 aces oso on mando compete 2700000 low much reat sold J ogi 08 hi omc Is yer? 300 owe © snow &saw0 ‘rag. 1236(AICPA) xc Co, # onsen company, uses uhe percentage of completion fect 2014, Excelent began Work on a contract 19 construct an offie ‘ling for. 10,00 and twas completed in 2015. Duta on the cost are: wysinos_ 12512015, con nar 390,000" ~ 260,000 ‘rime it complete 260,000 Forth yous 204 an 2015, Excellent should recognize gross profit of EI 2s . © 30000 Som Ir = 700 160000 4 200 30000 ive Cor. at entered imo avery poe id Fie Condominium building over a peril ersnee Ss ea of PIB milion. incu the Tnons ew i te it ea of constrain ™ SHY ails asm Setar cost 2 Ste dministraion cous as pr coat to tee reimbursed bythe astomer 10 Gaon of he plan wid forthe consiacion yy ld Devising costs for sling cond units when they ae ready for occupancy 10m wats percentage of completion of his cone? 2 B1B% ‘ Lm oom ‘908.1228 (AICPA) ‘Built Corp. is constructing a building and has signed a fepice moet ‘romect for P21 milion, 1 has inured the fllowing cot resting ont by the end of first yer: Materials P somtln Labor Romo ‘Consiucton overhead Lomiion Marketing ‘Smite Depreciation of dle plant and equipment 5 min ‘A the end of Year1, it has estimated cost 10 compet milion. What profit of loss from the const should Butt oF ‘dof Yea?" © 1S million Vo mition 5 1.05 million 4 129nilliono pron. 12-29(A1CPA) eine en come a er tee od ‘Serena ae ‘tie irre oat de perenge of oepeton methods a Ao ye ay Tore et pit me 2014 nsome semen? PROB. 12-30 (AICPA) Ste Copies ren ad expenses asi ‘hough 204 Toman on he projec lows: 2013, Rechabe fom consrtion contact 10,000 Contin eres 105.000 Conse nga 12.000 Pal lingo cont 00,000 pis FCO CN IS ag tiie ob “re soem the percentage of conse inetd During 301 single longterm project was begun. which coined 00.000 | 3000 364,000 ‘2000 roi eopind fom the lang erm constuction contrat in 2014 shoul e 0000 arr) © 1k <2 ae " er joie con avec 920 ee PROUDOND. Adasen ee csnting po Te ene tome pepo oF tt ln ‘the contract. The financial present std ene nite ego tS alae Sheet corr bigs. Aecevahle- conn Constetion in prog sonagy "I {escort bilings 00 Contof uncompleted const in cone bins me Income Sere Income (before 2) onthe contrast recogni in Yar! Fenn iow much cash was collected in 214 on this cont? 320,000 30000 © 570.000 4 S0o,000 R08, 12-32 (AICPA) ‘Sepa Construction Co, fas consist wlth coef cmpeoe ‘te On Janay 10,2013, Shepard began woken 4.00109 eseten fontac. AL the inception date, the esinated cot of cosuton st 2250.00. The following data relate to he progres hens. Gems Fecoprized at December. 2013 i am ina nur 10213 hh De 31.208 Estimated costo complete at Decent, 2014 ‘oxo ch income should Shepard resopie he yer end De Hew ame 8 & @ee ” ren Consrton Co pron. 13-39(AIC? 1, 2013+ eered ito a fixed be es cms wn pee ee, pre ing o 0b see Came ag hey aes SOP ode te poco of can ay ma a ane cin nT cag gt Oe me a lows se hace 1500000 faa er ended December 31,2014 ts ios Se tear Meme)! my ef compltion a cos iced Ps a ca completion Fal Seams color ‘Sen, Eaimard cot wcompletion 72230000 ae ioe (amen isto "4H be aes ‘of contract cost incurred 4 Cm porriee) Mn yee en ‘How uch loss shooid Jessup have recognized in 2014? 320 a t 000 sae sa rae ©0000 See i aco ose beeen he Gna Coton Co. aed wrk neh i i ae mon 1-34 arena ‘Deming tie te joe pen ete satin rt pet aa conn cm OM tele teOw Aut 2013, eet a wet oe ‘dominion wat obtained at 8 pice of 8,700,000. Below are the da Se ge teed comets eee en esr Jono tinom = angod eam i, 2014 ‘SaFermando — 280,000 100,000 100,000 0 0 Eid ot copii si What amount of income shouldbe reported forthe caret yer te Coane oe gn "ose Prenat compen mel rans iawn S00 comet . De ew nro wt he moat conf conte i & Hem ring the your ended December 31, 201 240,000 + jim © Wat wos be th amount rented ta mou of Coan in 5 Shige ‘acs hat fie poranage femal ¢ 3545250 © 165,000, % 265,000 & $800 neeto ROR. 1237 045) Avision 1 Anime cee fr change inthe poten wnse tenet MSOF or 1 Roto recess to colt fm the ‘iene fir cox ot led inthe como OM (& Anaiiea ann pa othe concer ch sence POE OR pit peromane 4 Theta anon oven aged in the conc Ron 1.9 aFR5) [Be Pn Co sane determine the tl mvense on cone, {toy fr the Ase Co Alleles ae wesc ‘Gsmetin Conrad Pie Co as ented along, et PS Inia pee fine Yesuentee conc) on Penal (Nowe 2) ieee renee Naw: Daring te con ond ae Ae Ehngsd the speciicton of te si mc: A strike at Pine cause SERS Pit cued ey for which the penalty in he vga ‘Se PnotTswas ncn ay i i por pstmt perce) Pea eee Ramos Pivcreational facility, he estimates ost 1 complet te project was Bera ce erences ae Soe ae ee se Si cere pr etae shggelatas en mame easel Pes — Vien a2 ee noe 2 SS : der the percentage of conpletin maha epg tm “kWh waste al estima ps pai sie ar Dene oon 113.990 9850 132s000 ‘Ansnerntien Bee eth yearend at wash timated ss pois Dever 31,2018 2 232.560 B cisaso e620 Another Prop. 12-<0¢Adaned) - neti conmein os le rama Kon Ra Te ain ra esa ‘ee—ay i ty jg Comeraction Corot, ae siti ero win 1048 00 png, sing te percentage of Vin a te ae ha coe atten gre 1 aur + MAES Raia yt oe to me 2 toe =e 2 see cmv pe rs tr bet to ting POSEN contin med. ah ‘Fi esas #P5000.00 gross profit frm the pret and sprig 1 Leruction in progress account Bat hon fs Be bce of Seems frp mel ena ye sneae a FEwil ue soa erent oesonding to 50% compicty 2 sition: Fie ede cence a is procace . a nay te ftong gar Wee ‘ Tae ng eed ch was Oe Janay of te Yoon eae f ‘Spelt oc ne a ‘2. What is the amount of profit realized from the project in 20147 ican mon 12-42 (Adapted) & omano hs Coutection Co. tas wed the comin prem med © Romo Messi sever. Te flowing coapee rnd con bole te 415,000,000 _esently completed building project. - 1 ate hel ant fh ole y Fi I om is pie aon my me ontnet rice “PELA0057 + sesonon Gros proton) "40000 — PiAcvoM —FaRAe) & Romone Cotiscored3aanoo TPE © frome & son 1 Mow much cost was cured in 2015 18400000 ton ROR 12-4 cas) © "Senate ‘A Turt-Key contact was perfected between Built-In Builders and a custome et ‘ peat: 4 count price ofP200,000. The eximated cast atthe time the enim '. What percentage (rounded) ofthe projet wes competed by en of el omy 25,2014 44, At December 4, Be a ani aera 759000 vib a intel con comple na00 Ba ini uterine ano o 7,00 an reed P00. tam © om a meWhat waste estimated cost to complete the projet atthe 3.060000 Oto» 750008 & —aomooo ay © &20n000 . 94,000 ‘ ji icra PROB. 12-a3(AICPA aon. 12-45 (AICPA 4 Consiinn CO. ves the periae of conse etl ies ces ete psa ete aC ta ot es se smi se any 3p sca Set oe a sa sl hw sad on wich 409,00 of rss profit has been resumed sf ryt period a cancion In coretion woh hi ora ea forte ote cents fllows rire i xu. 000 0 Fae rcued POD .00 of conscon cms ung 014 Adan edo feted PFS00,000 from Roy n 2014 ‘Teal cost ncured trough current year alee Pf P S000 a Be poeta deeeceemee a tenet 2a) ow mich os poi shld Adams ee a2 ‘What isthe toss hat Lake should recognize in the current year? eed & Rotwo = 187500 © sonteo 4 125,000 1.400.000 4 ° PROB, 12-46 (Adapted) . “as seria a cor coms 9 in = yt dn te SES Smt ct (On January 3 2014, Erectors. fst 0.000000, ects use he estos Land Construction Co, has consistently used the percentage of complcion competed. During the constntion per method of recoprizig income. During 2012, Land started work on P'7.50.00| cei E Siren Seeger aed contacton contact whch wes complet in 2015, The sein Sivan erage ae 018 ters ed ong at Ce iad oe, caer Cumulative coninet Estimated costs eres np —szisincumed __atcomplion_ Ov conner “FET PS ao ‘AtDecember 31,2012 300,000 5,000,000 Change order No.1 102000 ‘ooo ‘ ‘seme came ee Cheon) ce Ne December 31,2014 $000,000 “po0.000 Change rderNe.3 690000 Son ‘How much income should Land have recognized on this a eae ‘ended December 31, 20147 recognized on this contract forthe ye Change oderPan seem “ars pcmta fete oi etn 2047 me rane] . Bm a im Wat sth anent of inated oss Ua Wl be opi g anu = sa000| 8 tmssoo tn 204, Exctor Conon Co. saned consncton ofa building with ‘Zocna price af 7100000000 tnd exmated tual costs of P9000. Sl; Eo cured coscton cot nth amount PS4,00,00. ing te no profit meh of accounting. wha is the amount of resent be recoiznd 20197 90.00.00 % caomseo © $0000 “6000 ae suiTto8S AND EXPLANATIONS a swagested answer (a) Combined ond rater 7 ig oma her hh coat rnd et id eah otk. ominous 908 oe "ake on. 12-2 Suggested ener) Cot). ond) “according 10 14S 11, Constracin Conc coma ts. seiathat directly relat toa conan, or tame cea gece, ‘Sed mh consracton sit Teor cost the cat of hin eee ot preclation of equipment wed nthe coat. naaion tse ay {Ui nce om lloceton of ass Incured cry et cota [nral for example, insurance and consrucanowha! I ahr on (re Leif as beng specifiy recoverable deo patel ome. thee shold oo form part of he const co oft co. MOB, 12-3 Suggested onswer (id) General aimnisrton co fe wih eimbursement iso spied be Conrat cost should include the costs tha diet rea acon ‘ats of materials, labor cots, cast of ig quip nd eed ‘eprciaion) amd allocation of eats incred tocar oom ‘in general (eg insurance and consrction overt) I he ‘denied as being specticaly recoverable ander 2 pr these should also form part ofthe consncton cass of ht Pon, ed 1 Sere newer (0 Te a jon sn aac nh conpion f= ance i et He