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Chapter 7
Construction Contracts
NAME: Date:
Professor: Section: Score:

QUIZ:
1. The primary issue in the accounting for construction contracts is
a. the determination of the percentage of completion and revenue to be recognized
during the period.
b. the allocation of contract revenue and contract costs to the accounting periods in
which construction work is performed.
c. the determination of the rate at which physical performance has been made
during the reporting period and the future performance on which future
revenues will be allocated.
d. the allocation of costs of a long-lived asset to permit the proper matching of costs
with revenues.

2. According to PFRS 15, each contract is accounted for separately. However, two or
more contracts entered into at or near the same time with the same customer are
combined and accounted for as a single contract if any of the following conditions
are met, except
a. The contracts are negotiated as a package with a single commercial objective.
b. The amount of consideration to be paid in one contract depends on the price or
performance of the other contract.
c. Some or all of the goods or services promised in the contracts are a single
performance obligation.
d. At contract inception, the collectability of the consideration is probable of
collection.

3. Which of the following does not indicate that a promise to transfer a good or service
is separately identifiable?
a. The good or service is not an input to a combined output specified by the
customer.
b. The good or service does not significantly modify another good or service
promised in the contract.
c. The good or service is not highly interrelated with other goods or services
promised in the contract.
d. The customer’s decision of not purchasing a good or service affects the other
promised goods or services in the contract.

Use the following information for the next three questions:


Information on Red Hot Co.’s construction contracts with customers which commenced
during 20x1 is shown below:
Contract 1 Contract 2
Contract price 420,000 300,000
Costs incurred during the year 240,000 280,000
Estimated costs to complete 120,000 40,000
Progress billings 150,000 270,000
Collections 90,000 250,000
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4. At contract inception, Red Hot Co. assessed that its performance obligation in each
of Contract 1 and Contract 2 is satisfied over time. Red Hot Co. uses the ‘cost-to-cost’
method in measuring its progress on the contract. How much total profit (loss) is
recognized from the two contracts in 20x1?

5. At contract inception, Red Hot Co. assessed that its performance obligation in each
of Contract 1 and Contract 2 is satisfied over time. However, Red Hot Co.
determined that the outcome of the performance obligation in each of the contracts
cannot be reasonably measured but contract costs incurred are recoverable. How
much total profit (loss) is recognized from the two contracts in 20x1?

6. At contract inception, Red Hot Co. assessed that its performance obligation in each
of Contract 1 and Contract 2 is satisfied at a point in time, that is, when the
construction is completed. How much total profit (loss) is recognized from the two
contracts in 20x1?

7. VALEDICTION Construction Co. entered into an ₱80M fixed price contract for the
construction of a private road for FAREWELL SPEECH, Inc. The performance
obligation on the contract is satisfied over time. VALEDICTION measures its
progress on the contract using the “cost-to-cost” method. The estimated total
contract cost is ₱40M. VALEDICTION incurred the following costs in the first year
of the construction:

Costs of negotiating the contract (charged immediately


as expense) 400,000
Costs of materials used in construction 12,000,000
Costs of materials purchased but not yet used in
construction 2,000,000
Site labor costs 4,000,000
Site supervision costs 800,000
Depreciation of equipment used in construction 480,000
Depreciation of idle equipment not used in the
contract 240,000
Costs of moving equipment and materials to and from
the construction site 160,000
Costs of hiring equipment 560,000
Advance payment to subcontractor (the subcontracted
work is not yet started) 80,000

How much revenue is recognized in the first year of the contract?


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Use the following information for the next two questions:


On July 1, 20x1, Contractor Co. enters into a contract with a customer for the
construction of a building. At contract inception, Contractor Co. assesses the contract in
accordance with the principles of PFRS 15 and concludes that it has a single
performance obligation that is satisfied over time. Contractor Co. then determines that
the appropriate measure of its progress on the contract is input method based on costs
incurred. Information on the contract is shown below:

Contract price 600,000


Contract costs incurred during 20x1 120,000
Estimated remaining costs as of Dec. 31, 20x1 240,000
Billings to the customer during 20x1 180,000
Collections on billings during 20x1 60,000

8. What amount of revenue is recognized on the contract in 20x1?

9. What amounts are presented in Contractor Co’s. statement of financial position


under <List A: Traditional accounting> and <List B: PFRS 15>?
Gross amount due from (to) cust. Contract asset(liability)
a. 20,000 20,000
b. (20,000) (20,000)
c. 20,000 (20,000)
d. (40,000) (40,000)

10. In 20x1, Silverchair Co., a construction company, enters into a contract with a
customer for the construction of a building. The contract states a fixed fee of
₱8,700,000. Silverchair’s performance obligation in the contract is satisfied over time.
Silverchair uses the ‘cost-to-cost’ method in measuring its progress in the contract.
Information on the contract follows:

20x1 20x2
Estimated total costs at completion 6,525,000 6,960,000
Percentage of completion 15% 65%

How much is the profit recognized in 20x2?


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Use the following information for the next two questions:


In 20x1, Gorgeous Too Co. enters into a fixed-price construction contract with a
customer. At contract inception, Gorgeous Too Co. assesses its performance obligations
in the contract and concludes that it has a single performance obligation that is satisfied
over time. Gorgeous Too Co. determines that the measure of progress that best depicts
its performance on the contract is input method based on costs incurred.

Information on the contract follows:


20x1 20x2
Cumulative contract costs incurred 2,250,000 4,800,000
Cumulative profits recognized 750,000 1,200,000
Progress billings 2,400,000 3,600,000
Collections on progress billings 2,000,000 4,000,000

The contract is completed in 20x2.

11. What amount of revenue is recognized in 20x2?

12. How much is the transaction price in the contract?

Use the following information for the next two questions:


In 20x1, ABC Co. was contracted to build a railroad. The contract price is equal to the
construction costs incurred plus 20% thereof. However, if the project is completed
within 4 years, ABC will receive an additional payment of ₱200,000. Information on the
project is shown below:
20x1 20x2 20x3
Costs incurred to date 2,400,000 4,575,000 6,125,000
Estimated costs to complete 3,600,000 1,525,000 125,000

In 20x1 and 20x2, it was not highly probable that the project will be completed on time.
However, in 20x3, ABC assessed that project will be completed earlier than originally
expected and thus it is now highly probable that the incentive payment will be received.

13. How much revenue is recognized on the contract in 20x3?

14. How much profit is recognized on the contract in 20x3?


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Use the following information for the next two questions:


In 20x1, Salamagi Co. entered into a contract with a customer. The contract stipulates
the following:
• Contract price of ₱20,000,000
• 5% mobilization fee due upon signing of the contract, to be deducted from the final
billing
• 10% customer retention on all subsequent progress billings, to be paid to Salamagi
on completion of the project

Salamagi Co. estimated a ₱5,000,000 gross profit from the project. The percentage of
completion method will be used. In 20x1, Salamagi billed the customer for 50%
completion of the project. The customer accepted all the billings, except one for 10%
which was accepted on January of the following year. All the accepted billings were
collected during the year except an 8% billing which was due January of the following
year.

15. What is the amount of profit recognized from the contract in 20x1?

16. What is the total amount of collections from the billings in 20x1?

Use the following information for the next two questions:


In November 20X2, an entity contracts with a customer to refurbish a 3-storey building
and install new elevators for a total consideration of ₱5,000,000. The promised
refurbishment service, including the installation of elevators, is a single performance
obligation satisfied over time. Total expected costs are ₱4,000,000, including ₱1,500,000
for the elevators. The entity determines that it acts as a principal because it obtains
control of the elevators before they are transferred to the customer.

A summary of the transaction price and expected costs is as follows:

Transaction price ₱5,000,000


Expected costs:
Elevators ₱1,500,000
Other costs 2,500,000
Total expected costs ₱4,000,000

The entity uses an input method based on costs incurred to measure its progress
towards complete satisfaction of the performance obligation. The customer obtains
control of the elevators when they are delivered to the site in December 20X2, although
the elevators will not be installed until June 20X3. The costs to procure the elevators are
significant relative to the total expected costs to completely satisfy the performance
obligation. The entity is not involved in designing or manufacturing the elevators.

As of December 31, 20X2, the entity has incurred total costs of ₱500,000, excluding the
cost of the elevators.
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17. How much revenue is recognized in 20X2?

18. How much profit is recognized from the contract in 20X2?

19. An entity, a construction company, enters into a contract to construct a commercial


building for a customer on customer-owned land for a promised consideration of ₱1
million and a bonus of ₱200,000 if the building is completed within 24 months. The
entity accounts for the promised bundle of goods and services as a single
performance obligation satisfied over time because the customer controls the
building during construction. At the inception of the contract, the entity expects the
following:
Transaction price ₱1,000,000
Expected costs 700,000
Expected profit (30%) 300,000

At contract inception, the entity does not expect to receive the bonus because it
cannot conclude that it is highly probable that a significant reversal in the amount
of cumulative revenue recognized will not occur. Completion of the building is
highly susceptible to factors outside the entity’s influence, including weather and
regulatory approvals. In addition, the entity has limited experience with similar
types of contracts.

The entity determines that the input measure, on the basis of costs incurred,
provides an appropriate measure of progress towards complete satisfaction of the
performance obligation.

Information as of the end of the first year is as follows:


Costs incurred to date ₱420,000
Total expected costs ₱700,000

The entity reassesses the variable consideration and concludes that the amount is
still constrained.

In the first quarter of the second year, the parties to the contract agree to modify the
contract by changing the floor plan of the building. As a result, the fixed
consideration and expected costs increase by ₱150,000 and ₱120,000, respectively. In
addition, the allowable time for achieving the ₱200,000 bonus is extended by 6
months to 30 months from the original contract inception date. At the date of the
modification, on the basis of its experience and the remaining work to be
performed, which is primarily inside the building and not subject to weather
conditions, the entity concludes that it is highly probable that including the bonus
in the transaction price will not result in a significant reversal in the amount of
cumulative revenue recognized. In assessing the contract modification, the entity
concludes that the remaining goods and services to be provided using the modified
contract are not distinct from the goods and services transferred on or before the
date of contract modification; that is, the contract remains a single performance
obligation.
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How much is the cumulative catch-up adjustment to revenue recognized on the


date of contract modification? (round-off percentage of completion to one decimal place
only)

20. ABC Co. started work on a construction contract in 20x1. The contract price is ₱10M.
However, the contractual agreement stipulates that if the cumulative inflation
reaches or exceeds 26%, the contact price shall be adjusted upwards by 10%.
Additional information on the contract is shown below:

20x1 20x2
Costs incurred to date 2,400,000 4,500,000
Estimated costs to complete 3,600,000 1,500,000
Cumulative inflation rate 18% 27%

How much is the profit recognized in 20x2?

“Come to Me, all you who labor and are heavy laden, and I will give you
rest.” (Matthew 11:28)

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