LONG-TERM CONSTRUCTION CONTRACT

›Delivery is uncertain
›CID (Cost incurred to date), RGP (Realized gross profit), TD (to date), PY (Previous years), CY (Current year).
›Terms:
Construction contract – contract specifically negotiated for the construction of asset/ combination of assets that are
closely interrelated in terms of design, technology or their ultimate purpose or use
Fixed price contract – there is agreed fixed contract price or fixed rate per unit of output.
Cost plus contract – reimbursed for allowable or defined cost plus a percentage these cost or a fixed fee.
Contract revenue – measured at FV of consideration received or receivable
Contract cost – cost that relate directly to specific contract, can be allocated to it, specifically chargeable to customer.
Percentage of completion (POC) method – used when outcome of construction can be estimated reliably. When
estimated cost to complete and extent of progress toward completion are reasonably dependable.
Input method – POC is equals to the ratio of cost incurred to date to total estimated cost.
Output method – POC is determined based on results achieved (certain phases are completed). Engineering
estimates
Zero profit method – when outcome cannot be estimated reliably. No GP is recognized until completed. Revenue
recognized is equal to cost.

POC method Zero Profit method

Total Contract Price Pxx Pxx

CID Pxx Pxx
Estimated cost to complete xx xx
Total estimated cost (xx) (xx)
Expected GP (L) Pxx Pxx
POC% xx% 0%
RGP-TD Pxx Pxx
RGP-PY (xx) (xx)
RGP-CY Pxx Pxx

›If expected GP is a loss, multiply by 100% under both method to get RGP-TD.

CID Pxx
RGP-TD _xx_
CIP (Construction in Progress) Pxx ›This is also the contract price recognized to date
Project billings (xx)
CA (CL) Pxx

›CA (CL) reported in SFP. CIP is treated as inventory.

Entries:
CIP xx
Cash xx
CIP xx ›Represents GP realized this year (RGP-CY)
Contract cost xx ›Contract cost = actual cost incurred for that year
Contraction Revenue xx › Contract Revenue is a balancing figure.
AR xx
Progress billings xx
Cash
AR
Progress billings xx` ›Entry after completion. PB must be equal to CIP
Construction in progress xx

Computation of AR
AR, beg Pxx
Progress billings xx
Collections (xx)
AR, end Pxx

›Mobilization fee is simply considered as collection

›Contract retention treated simply as AR (just different name, presented separately in SFP)