Kind of costs EXCLUDED Note: TCITD is cumulative.

Directly • Selling costs →

attributable expense • Is the outcome profit or loss?
Indirectly • General and o POC
attributable administrative costs ▪ If profit, use POC
• Depreciation of idle ▪ If loss, use 100%
assets o Zero-profit
• R&D costs → ▪ Profit = 0
expense ▪ Loss = 100%
• Advances to • Data: per year or as of?
Reimbursable subcontracted → o Income statement -> nominal -> cost
receivable incurred each year
• Materials delivered o Balance sheet -> real -> cost incurred to
but not yet utilized date
except specialized
materials BALANCE SHEET APPROACH

FORMULAS Construction in Progress

• Percentage of completion Costs incurred to Cumulative RGL
o Costs incurred to date / total costs date (CI) (L)
▪ Costs incurred to date will be reduced by Cumulative RGP
gain on disposal of excess and scrap (P)
materials Ending balance
(CIP)
METHODS OF REVENUE RECOGNITION
• Cost recovery (zero-profit) Progress Billings
o No profit is recognized until construction Beginning
contract is completed Additional billings
o Outcome cannot be estimated reliably Ending balance
o Revenue is recognized only to the extent of
contract costs that are probable (If POC is Accounts Receivable
not yet 100%, CR = CC → RGP = 0) Progress billings to Collections
o Contract costs are recognized as an date
expense in the period in which they are Ending balance
incurred
▪ Very similar to the recognition of COGS CIP XX
Progress billings (XX)
• Percentage of completion Net XX
o Used when the problem is silent • Net is positive -> current asset (due from
o Used when the outcome can be estimated customer)
reliably • Net is negative -> current liability (due to
Difference Formulas customer)
Input Cost to cost TCITD / ETCC
Output Engineering or
estimate TCITD / (TCITD
+ ETCC)
JOURNAL ENTRIES • Does not have an income element
o Ignore this when solving for RGP and net
1.1. Incurrence of cost income. See, no effect on net income
Raw materials XX • Think of it as contractors’ protection
Salaries XX
Utilities XX JOURNAL ENTRIES
Cash XX
Cash XX
1.2. Transfer to WIP or CIP Contract retention XX
Construction in progress XX Accounts receivable XX
Raw materials XX
Salaries XX Cash XX
Utilities XX Contract retention XX

But hassle ‘yan, so— MOBILIZATION FEE

1. Incurrence of cost • Liability
Construction in progress XX • Deducted from bills of contractors in equal
Cash XX installment covering the project period
o Just check whatever’s given in the problem
2. Progress billings • Does not have an income element, so ignore
Accounts receivable XX again when solving for RGP and NI
Progress billings XX • Does not affect progress billing, but affects
accounts receivable
3. Collection on progress billings
Cash If profit If loss
Accounts receivable Construction Always (CIP > (CIP <
CI) CI)
4. Profit recognition – POC method CIP + (1
CIP (profit) XX Revenue POC x
CIP – POC) x
Construction costs (bal) XX (as of) TCR
loss
CR XX
CR – CI + (1 –
Cost to
Cost (as of) RGP to POC) x
Construction costs (bal) XX date
date loss
CR XX
CIP (loss) XX
PERCENTAGE OF COMPLETION
5. Settlement
COST-TO-COST METHOD
Building XX
Contract price XX
CIP XX
Total estimated costs
Progress billings XX Costs incurred to date XX
CIP XX Estimated costs to complete XX XX
Total estimated gross profit (A XX
Note: CIP in the year of completion = 0 to D)
Multiply by: POC %
CONSTRUCTION REVENUE USING (R)Gross profit to date XX
PERCENTAGE OF COMPLETION METHOD (R)GP – previous year (XX)
(R)GP – current year XX
• First year • Contract price is affected by
o CR = contract price x POC + escalation clause (increase in certain costs)
• Second/subsequent years - de-escalation clause (opposite)
o CR = contract price x change in POC - penalty clause
- incentive payment
+/- modifications or variations or adjustments
CONTRACT RETENTION Add if: increase in cost
• May be part of billing, but not paid to contractor Deduct if: decrease in cost