Chapter 08 dayag

Chapter 8 Problem I 1. Input Measure - Percentage of Completion Method (Cost to Cost Method) 2008: Contract price P 1,800,000 Actual costs to date P 450,000 Estimated costs to complete 1,200,000 Total estimated project costs 1,650,000 Estimated total gross profit 150,000 Percentage of completion: P450,000 / P,1650,000 27.27% Gross profit recognized P 40,905 2009: Contract price

P 1,800,000 Costs incurred: 2008 2009

P 450,00 1,100,000

Total cost Total gross profit Recognized in 2008 Recognized in 2009 2. Input Measure - Cost Recovery Method 2008: (all costs not yet recovered) 2009: Contract price Costs incurred: Total cost Total gross profit

1,550,000 250,000 40,905 P 209,095

P -01,800,00 2008 2009

P 450,000 1,100,000 1,550,000 P 250,000

Problem II 1. Input Measure - Percentage of Completion Method (Cost to cost Method) Years Gross Profit (or Loss) Supporting computations recognized 2008 P 2 million (P108 – 90) x (P30/P90) = P6 million 2009 ( P18 million) Total loss is (P108 –120) = (P12 million) To date, P6 million was recorded: therefore, (P12 million) – P6 million = (P18 million) in 2009 2010 P 10 million Total loss is P 108 – 110) = (P2 million) To date, (P 12 million was recorded: therefore, ( P2 million) – (P12 million) = P10 million in 2010

2. Input Measure - Cost Recovery Method Years Gross Profit (or Loss) 2008 P -0-

2009 2010

(P 12 million) P 10 million

Supporting computations ( P108 – 90) = P18 anticipated gross profit, so no need to recognized a gross loss Total loss is ( P108 – 120) = (12 million) Total loss is (P108- 110) – ( P2 million) To date, ( P12 million was recorded: therefore, ( P2 million) – ( P12 million) = P10 million in 2010

Problem III 1. Journal Entries a. Input Measure – Percentage of completion – (cost-to-cost method) The following analysis is to determine the percentage of completion: Contract price: Initial amount of contract…………... Variation……………………………….. Total contract price…………………….. Costs incurred each year……………… Add: Costs incurred in prior years……. Actual costs incurred to date (1)…..… Add: Estimated costs to complete….. Total estimated costs (3)……..………… Estimated gross profit…………………… Percentage of completion (1) / (3)

20x3

20x4

20x5

P528,000 _______P528,000 P 126,048 _______P126,048 _358,752 P484,800 P 43,200 26%

P528,000 __12,000 P540,000 *P244,032 _126,048 *P370,080 _121,920 P492,000 P 48,000 **74%

P528,000 __12,000 P540,000 P121,920 _370,080 P492,000 _______P492,000 P 48,000 100%

* including the P7,200 additional costs in 20x4. ** it should be noted that the percentage of completion for 20x4 is calculated by deducting the P6,000 of materials held for the following period from the costs incurred up to that year end, i. e., P370,080 – P6,000 = P364,080, P364,080 / P492,000 = 74%.

The revenue, expenses (costs) and profit will be recognized in profit or loss as follows: 20x3 Revenue (P528,000 x 26%) Costs/Expenses (P484,800 x 26%) Gross Profit (P43,200 x 26%)

To date P 137,280 126,048 P 11,232

Recognized in prior years -

Recognized in current year P 137,280 126,048 P 11,232

20x4 Revenue (P540,000 x 74%) Costs/Expenses (P492,000 x 74%) Gross Profit (P48,000 x 74%)

To date P 399,600 _364,080 P 35,520

Recognized in prior years P 137,280 _126,048 P 11,232

Recognized in current year P 262,320 238,032 P 24,288

20x5 Revenue (P540,000 x 100%) Costs/Expenses (P492,000 x 100%) Gross Profit (P48,000 x 100%)

To date P 540,000 _492,000 P 48,000

Recognized in prior years P 399,600 _364,080 P 35,520

Recognized in current year P 140,400 _127,920 P 12,480

Alternatively, the gross profit recognized each year may also be computed as follows: 20x3 Contract price:

20x4

20x5

Initial amount of contract…………....... Variation…………………………………… Total contract price………………………… Costs incurred each year…………………. Add: Costs incurred in prior years……….. Actual costs incurred to date (1)…..……. Add: Estimated costs to complete……… Total estimated costs (3)……..……………. Estimated gross profit……………………… Percentage of completion (1) / (3)……... Gross profit to date…………………………. Less: Gross profit in prior years……………. Gross profit in current year -% of completion Gross profit in current year –cost recovery method

P528,000 _______P528,000 P126,048 _______P126,048 _358,752 P484,800 P 43,200 ____26% P 11,232 _______P 11,232 P 0

P528,000 __12,000 P540,000 P240,032 _126,048 P370,080 _121,920 P492,000 P 48,000 ____74% P 35,520 ___11,232 P 24,288 P 0

P528,000 12,000 P540,000 P121,920 _370,080 P492,000 _______P492,000 P 48,000 ___100% P 48,000 __35,520 P 12,480 P 48,000

Following are the entries for the years 20x3 to 20x5: Percentage of Completion Method 20x3 1. To record costs incurred: Construction In Progress*………...... Materials Inventory………………….. Cash, payables, etc……………..

126,048

232,032 6,000 126,048

2. To record progress billings: Accounts receivable……………….. Progress billings*.………………….

144,000

3. To record collections: Cash…………………………………..... Accounts receivable……………

120,000

4. To recognize Revenue, Costs and Gross Profit: Construction Expenses……………… Construction in Progress*..……….... Revenue from Construction......

20x4

127,920 6,000 121,920

244,032

240,000 144,000

156,000 240,000

228,000 120,000

126,048 11,232

20x5

156,000

192,000 228,000

238,032 24,288 137,280

192,000

127,920 12,480 262,320

5. To close Construction In Progress** and Progress Billings account: Progress billings……………………… Construction In Progress………. * The term “Contract account” may alternatively be used. ** If “Contract account” is used then no entry is required for No. 5.

140,400

540,000 540,000

b. Input Measure – Cost Recovery Method The following table shows the data needed for further analysis: 20x3 Contract price: Initial amount of contract…………... Variation……………………………….. Total contract price…………………….. Costs incurred each year……………… Add: Costs incurred in prior years……. Actual costs incurred to date……....… Add: Estimated costs to complete…..

P528,000 _______P528,000 P126,048 _______P126,048 ____ _?

20x4 P528,000 __12,000 P540,000 P244,032 _126,048 P370,080 ____ _?

20x5 P528,000 __12,000 P540,000 P121,920 _370,080 P492,000 _______-

Total estimated costs ….……..…………

P

?

P

?

P492,000

The revenue, expenses (costs) and profit will be recognized in profit or loss as follows: 20x3 Revenue* Costs/Expenses Gross Profit * equivalent to costs incurred

To date P 126,048 126,048 P 0

Recognized in prior years -

Recognized in current year P 126,048 126,048 P 0

20x4 Revenue* Costs/Expenses Gross Profit * equivalent to costs incurred

To date P 364,080 _364,080 P 0

Recognized in prior years P 126,048 126,048 P 0

Recognized in current year P 238,032 238,032 P 0

To date

Recognized in prior years

Recognized in current year

20x5 Revenue (P540,000 x 100%)

P 540,000

Costs/Expenses (P492,000 x 100%)

P 364,080

_492,000

Gross Profit (P48,000 x 100%)

P 48,000

P 175,200

364,080

127,920

0

P 48,000

P

Alternatively, the gross profit recognized each year may also be computed as follows: 20x3 Contract price: Initial amount of contract…………....... Variation…………………………………… Total contract price………………………… Costs incurred each year…………………. Add: Costs incurred in prior years……….. Actual costs incurred to date ……...……. Add: Estimated costs to complete……… Total estimated costs …….…..……………. Estimated gross profit………………………. Percentage of completion……………….. Gross profit to date…………………………. Less: Gross profit in prior years……………. Gross profit in current year………………...

P528,000 _______P528,000 P 126,048 _______P 126,048 ____ _? P ? P 0 _ -___ P 0 _______P 0

20x4

20x5

P528,000 __12,000 P540,000 P244,032 _126,048 P370,080 ____ _? P ? P 0 _ -___ P 0 _______P 0

P528,000 12,000 P540,000 P 121,920 _370,080 P492,000 _______P492,000 P 48,000 ___100% P 48,000 __ 0 P 48,000

Following are the entries for the years 20x3 to 20x5: 20x3 1. To record costs incurred: Construction In Progress*………...... Materials Inventory………………….. Cash, payables, etc……………..

126,048

20x4 238,032 6,000

126,048

2. To record progress billings: Accounts receivable……………….. Progress billings*.………………….

144,000

3. To record collections: Cash…………………………………..... Accounts receivable……………

120,000

127,920 6,000 121,920

244,032

240,000 144,000

156,000 240,000

228,000 120,000

20x5

156,000

192,000 228,000

192,000

4. To recognize Revenue, Costs and Gross Profit: Construction Expenses……………… Construction in Progress*..……….... Revenue from Construction......

126,480

238,032 126,480

127,920 48,000 238,032

5. To close Construction In Progress** and Progress Billings account: Progress billings……………………… Construction In Progress………. * The term “Contract account” may alternatively be used. ** If “Contract account” is used then no entry is required for No. 5.

2. Due from/Due to Customers a. Input Measure - Percentage of Completion Method Current Asset: Accounts receivable………………………. Other receivables: Construction In Progress………………… Less: Progress billings……………………. Gross amount due from customers…... Raw materials Inventory……………………

Current Liability: Payables (“Payments on Account”) Progress billings……………………………… Less: Construction In Progress……………. Gross amount due to customers…………

Construction In Progress

20x3 P 24,000

175,920

540,000 540,000

20x4 P 36,000

P

20x5

-

P399,600 _384,000 P 15,600 P 6,000

P144,000 _137,280 P 6,720

Progress Billings

20x3 CI 126,048 Pr 11,232

144,000 20x3

end of x3 137,280 20x4 CI 238,032 Pr 11,232

144,000 end of x3 240,000 20x4

end of x4 399,600 20x5 CI 127,920 Pr 12,480

384,000 end of x4 156,000 20x5

540,000

540,000

540,000

540,000

where: CI - cost incurred each year Pr - profit

b. Input Measure – Cost Recovery Method Current Asset: Accounts receivable………………………. Raw materials Inventory……………………

20x3 P 24,000

20x4 P 36,000 P 6,000

P

20x5

-

Current Liability: Payables (“Payments on Account”)

Progress billings……………………………… Less: Construction In Progress……………. Gross amount due to customers…………

Construction In Progress

P 137,280 _144,000 P 6,720

P384,000 _364,080 P 19,920

Progress Billings

20x3 CI 126,048 Pr 0

144,000 20x3

end of x3 126,048 20x4 CI 238,032 Pr 0

144,000 end of x3 240,000 20x4

end of x4 364,080 20x5 CI 127,920 Pr 48,000

384,000 end of x4 156,000 20x5

540,000

540,000

540,000

540,000

where: CI - cost incurred each year Pr - profit

3. Gross Profit a. Input Measure - Percentage of Completion Method (refer to requirement 1 for detailed computation) Revenue……………………………………… Less: Costs / Expenses……………………... Gross Profit…………………………………….

20x3 P 137,280 _126,048 P 11,232

20x4 P 262,320 _238,032 P 24,288

20x5 P 140,400 _127,920 P 12,480

b. Input Measure – Cost Recovery Method (refer to requirement 1 for detailed computation) Revenue……………………………………… Less: Costs / Expenses……………………... Gross Profit…………………………………….

20x3 P 126,048 _126,048 P 0

20x4 P 238,032 _238,032 P 0

20x5 P 175,920 _127,920 P 48,000

Problem IV 1. Anticipated/Gross Loss a. Input Measure – Percentage of Completion (Cost-to-Cost Method)

2008: Contract price Actual cost to date Estimated costs to complete Total estimated project costs Estimated loss, recognized in 2008

P2,500,000 P1,500,000 1,200,000 2,700,000 P (200,000)

2009: Contract price Costs incurred:

P 2,500,000 In 2008 In 2008

P1,500,000 1,300,000

Total cost Total loss Recognized in 2008 Recognized in 2009

2,800,000 P (300,000) (200,000) P (100,000)

a. Input Measure – Cost Recovery Method Loss in 20x4 Loss in 20x5

P( 200,000) P (100,000)

2. Journal Entries a. Input Measure – Percentage of Completion (Cost-to-Cost Method) 2008: Construction in progress Various credits

1,500,000 1,500,000

Accounts receivable Billings on construction contract

1,200,000

Cash Accounts receivable

1,000,000

Cost of construction Construction in progress (loss) Revenue from long-term contracts* 2009: Construction in progress Various credits

1,588,889

Accounts receivable Billings on construction contract

1,300,000

Cash Accounts receivable

1,500,000

Cost of construction Construction in progress (loss) Revenue from long-term contracts**

1,211,111

Billings on construction contract Construction in progress

2,500,000

*P2,500,000 ** P2,500,000 Problem V

(P1,500,000/P2,700,000) 1,388,889

1,200,000 1,000,000 200,000 1,388,889 1,300,000 1,300,000 1,300,000 1,500,000 100,000 1,111,111 2,500,000

Item to compute Total revenue recognized during 2009 (w): CIP contains cost + gross profit = revenue, so w = P50 Gross profit recognized during 2009 (x): P50 – P35 = P15 Billings on construction (y) : P14 + P 46 = P60 Net billings in excess of construction in progress (z): Billings of P60 – CIP of P50 Calculate the percentage of PAC that was completed during 2009: 50/150 = 33.33% Problem VI Item to compute Cash collected by KP on Cincy One during 2009. (P75 billings – P10 A/R) Actual costs incurred by KP on Cincy One during 2009 (P66 CIP – P22 gross pofit) At 12/31/2009, the estimated remaining costs to complete Cincy One (44/{44 + x})(300 – {44 + x}) = 22; x = 156 The percentage of Cincy One that wa completed during 2009 100 x (44/ {44 + 156}) Problem VII 1. Progress billings on construction contract Less accounts receivable Cash collected in 20x4

Answer P50 million P 15 million P60million P10 million

333.33%

Answer P65 million P44 million P156 million 22%

P562,000 150,500 P411,500

2. Gross profit from construction contract + Construction in progress = Revenue for 20x4 P301,000 + P602,000 = P903,000 P903,000/P7,525,000 = 12% Percentage completed in 20x4 P301,000/.12 = P2,508,333 Estimated income on construction contract Problem VIII 1. Percentage of Completion Method (Cost-to-cost Approach) 20x4 Contract price ................... P250,000 Current year costs ............... 110,000 Costs to date .................... 110,000 Estimated cost to complete ....... 100,000 Estimated total cost ............. 210,000 Estimated total gross profit ..... 40,000 Percent complete ................. 52% Revenue to date .................. P130,000

20x4:

Revenue Costs (110/210 x 210) Gross profit

20x5:

Revenue

20x5 P250,000 120,000 230,000 20,000 245,000 5,000 94% P230,000

20x6 P250,000 15,000 245,000 0 240,000 5,000 100% P250,000

To Date at Dec. 31 P130,000 110,000 P 20,000

Previous Years

Current Year P130,000 110,000 P 20,000

P235,000

P130,000

P105,000

20x6:

Costs (230/245 x 245) Gross profit (loss)

P

230,000 5,000

110,000 P 20,000

120,000 P(15,000)

Revenue Costs Gross profit

P250,000 245,000 P 5,000

P235,000 230,000 P 5,000

P 15,000 15,000 P 0

20x4 1. 2. 3. 4. 5.

Revenue recognized during the year Gross profit recognized during the year Balance in the construction in progress account at Dec. 31 . Balance in the progress billings account at Dec. 31 . Net (3-4) or (4-3) – due from (due to)

20x5

20x6

P130,000

P100,000

P15,000

20,000

(15,000)

0

130,000

235,000

0

125,000 5,000

250,000 (15,000)

0 0

2. Cost Recovery Method 20x4 1. 2. 3. 4. 5.

Revenue recognized during the year Gross profit recognized during the year Balance in the construction in progress account at Dec. 31 . Balance in the progress billings account at Dec. 31 . Net (3-4) or (4-3) – due from (due to)

20x5

20x6

P110,000

P120,000

P20,000

0

0

5,000

110,000

230,000

0

125,000 (15,000)

250,000 (20,000)

0 0

Problem IX 1. Percentage of Completion Method (Cost-to-cost Approach) Contract price Current year costs Costs to date Estimated cost to complete Estimated total cost Estimated total gross profit Percent complete

2005 P250,000 150,000 150,000 90,000 240,000 10,000 63%

2006 P250,000 100,000 250,000 20,000 270,000 (20,000) 93%

2007 P250,000 15,000 265,000 0 265,000 (15,000) 100%

Revenue to date

P157,500

P232,500

P250,000

2005:

Revenue ............ Costs (150/240 x 240) Gross profit ............

2006:

Revenue ............ Costs ............

To Date at Dec. 31 P157,500 150,000 P 7,500

Previous Years

Current Year P157,500 150,000 P 7,500

P232,500 252,500

P157,500 150,000

P 75,000 102,500

2007:

Gross profit (loss) ............

P(20,000)

P 7,500

P(27,500)

Revenue ............ Costs ............ Gross profit (loss) ............

P250,000 265,000 P(15,000)

P232,500 252,500 $(20,000)

P 17,500 12,500 P 5,000

20x4

20x5

1. Construction costs (expense) recognized during the year 2. Gross profit recognized during the year 3. Balance in the construction in progress account at Dec. 31 (after closing entries) 4. Balance in the progress billings account at Dec. 31 . 5. NNet (3-4) or (4-3) – due from (due to) Balance in accounts receivable at Dec. 31 (after closing entries)

20x6

P150,000

P102,500

P12,500

7,500

(27,500)

5,000

157,500

230,000*

0

110,000 47,500

230,000 0

0 0

10,000

10,000

0

*P150,000 + 7,500 + 157,500 + 100,000 costs incurred during the year – 27,500 loss 2. Cost Recovery Method 20x4 1. Construction costs (expense) recognized during the year 2. Gross profit recognized during the year 3. Balance in the construction in progress account at Dec. 31 (after closing entries) 4. Balance in the progress billings account at Dec. 31 . 5. NNet (3-4) or (4-3) – due from (due to)

P150,000 0

20x5

20x6

P 80,000*

P20,000**

(20,000)

5,000

150,000

***230,000

0

110,000 40,000

230,000 0

0 0

Balance in accounts receivable at Dec. 31 (after closing entries) 10,000 10,000 0 *P100,000 costs incurred – P20,000 estimated loss = P80,000, revenue – 20x5 ** P250,000 – P150,000, revenue – 20x4 – P80,000, revenue – 20x5 ***P150,000 + P100,000 – P20,000 Multiple Choice Problems 1. a Costs incurred each year (2.5 M + 2.0 M + 1 M* + .5 M) Add: Cost incurred in prior years Costs incurred to date Add: Estimated cost to complete Total estimated costs Percentage of completion

P P

6M 0 6M

P 18 M 6 M / 18M

Administrative cost as long as reimbursable is included in the construction costs. Marketing costs are considered as expenses. Depreciation of idle equipment is charged to expenses. 2. b P7,200,000 ——————————— x (P15,000,000 – P12,000,000) = P1,800,000. P7,200,000 + $4,800,000 3. c P1,170,000 —————- x (P3,300,000 – P1,950,000) = P810,000 P1,950,000 (P3,300,000 – P2,010,000) – P810,000 = P480,000. 4. d Under the percentage of completion method, the Construction-In-Progress account is used for cost incurred during the year and any realized gross profit (loss). The following T-account is prepared:

5. b

6.

c

7.

a

CI in 2004 RGP in 20x4 (?) End of 20x4 CI in 20x5 RGP in 20x5 (?)

Construction-In-Progress 210,000 34,000 244,000 384,000 100,000

End of 20x5

728,000

P1,200,000 ————— x (P7,200,000 – P4,800,000) = P600,000. P4,800,000 P7,200,000 – P4,875,000 =P2,325,000.

Contract Price x: Percentage-of-completion Recognized Revenue to date Less: Costs incurred to date Gross Profit to date Less: GP in prior year Gross profit in current year 8.

a

9.

b

P3,600,000 ————— x (P8,400,000 – P6,000,000) = P1,440,000. P6,000,000 P8,400,000 – P5,600,000 = P2,800,000.

20x4 P4,800,000 _______75% P3,600,000 P3,400,000 P 200,000 _______-0P 200,000

Items 10 and 11 No number requirement identified, if percentage-of-completion then the answer would (a) a [P1,950,000 ÷ (P1,950,000 + P1,300,000)] × P2,250,000 = P1,350,000 (P5,500,000 – P3,350,000) – P1,350,000 = P800,000. 10. Cost Recovery Method - c - P5,500,000 – P3,350,000 = P2,150,000. 11. a - Gross profit is recognized in the year of sale, 20x4; therefore, in 20x6 no gross profit should be realized. 12. c

P600,000 —————————— x (P1,500,000 – P1,000,000) = P300,000 P600,000 + P400,000 (P1,500,000 – P1,050,000) – P300,000 = P150,000.

13. a Contract Price Less: Total Estimated Costs Costs Incurred-1/10/x4 to 12/31/x5 Add: Estimated costs to complete Less: Costs incurred to date Multiplied by: % of completion Gross Profit to date Less: GP in prior year (given) Gross profit in current year

P6,000,000 P3,600,000 1,200,000

4,800,000 P1,200,000 ___3.6/4.8 P 900,000 ___600,000 P 300,000

14. b 20x4: Cost to date – P7,500,000 x 20% 20x5: Cost to date – P8,000,000 x 60% Cost incurred during 20x5

P1,500,000 4,800,000 P3,300,000

15. b = (P25,000,000 × .60) – (P22,500,000 × .25) = P9,375,000. 16. b Costs Incurred Contract price………………………………………. Cost incurred each year………………………….. Add: Cost incurred in prior year…………………. Costs incurred to date…………………………….. Add: Estimated costs to complete……………… Total estimated costs………………………………. Estimated gross profit (loss)………….……………. Multiplied by: percentage of completion……….. Construction In Progress account Less: Progress billings Construction In Progress account (net) or Due from customers

50,000 P260,000 P 50,000 -0P 50,000 150,000 P200,000 P60,000) __50/200

15,000 65,000 30,000 35,000

17. d - P2,040,000 – P980,000 = P1,060,000 (revenue limited to costs incurred since cost-recovery method must be used). 18. a - P2,040,000 – (P1,000,000 + P1,000,000) = P40,000. 19. c - (P1,000,000 + P1,000,000) – (P648,000 + P1,280,000) = P72,000.

20. d 21. d Recognized gross profit (loss) to date………….. Less: Recognized gross profit in prior years……. Recognized gross profit each year……………..

P( 100,000) ____20,000 P (120,000)

22. b = P5,600,000 – (P2,560,000 + P3,280,000) = –P240,000. 23. c Contract price………………………………………. Cost incurred each year………………………….. Add: Cost incurred in prior year…………………. Costs incurred to date…………………………….. Add: Estimated costs to complete……………… Total estimated costs………………………………. Estimated gross profit (loss)………….……………. Multiplied by: percentage of completion……….. Recognized gross profit (loss) to date………….. Less: Recognized gross profit in prior years……. Recognized gross profit each year……………..

Prior year P7,000,000

P600,000

Current year P7,000,000

P5,000,000 2,800,000 P7,800,000 (P 800,000) _____100% (P 800,000) ___600,000 (P1,400,000)

24. c

P7,440,000  .30 = P2,232,000.

25. d

(P7,200,000  .75) – (P7,100,000  .30) = P3,270,000.

26. b

(P7,440,000  .75) – (P620,000  8) = P620,000 debit.

27. c

P7,440,000  .25 = P1,860,000 P7,500,000 – (P7,200,000  .75) = P2,100,000.

28. b

(P9,000,000 – P8,250,000)  (P3,795,000 ÷ P8,250,000) = P345,000.

29. c

P3,795,000 + P345,000 = P4,140,000.

30. d

P3,500,000 –P1,350,000 – P1,525,000 = P625,000.

31. b

P240,000 – P100,000 = P140,000.

32. d

P300,000 – P60,000 = P240,000 P240,000 ————————— x (P2,400,000 – Total estimated cost) = P60,000 Total estimated cost Total estimated cost = P1,920,000 P2,400,000 – P1,920,000 =P480,000.

33. c

(P6,325,000 ÷ P13,750,000) × P1,250,000 = P575,000.

34. a

(P6,325,000 ÷P13,750,000) × P1,250,000 = P575,000.

P6,325,000 + P575,000 = P6,900.000. 35. d - P85M costs incurred in 2011 = revenue recognized in 2011. Under the costs recovery (zeroprofit approach) of construction accounting, revenue is recognized up to the extent of costs incurred as long as it is probable will be recoverable. 36. b - 20x5: P12,000,000 > P11,870,000, No loss; 20x6: P12,000,000 – P12,400,000 = P400,000 loss. 37. a - Revenue recognized to the extent of costs incurred 38. c

P3,200,000 – P2,150,000 = P1,050,000.

39. c

P1,500,000 – P820,000 = P680,000.

40. a Under PFRS, the excess of Construction In Progress amounting to P2,100,000 (P2,250,000 – P150,000, loss) – P1,900,000, billings = P200,000 is classified as due from customers. Under the US FASB, the excess of P200,00 is considered as an inventory account. 41. c Costs of construction Construction in progress Revenue for long-term contracts

1,200,000 800,000 2,000,000

Percentage complete = P1,200,000 / (P1,200,000 +P600,000) = 2/3 Revenue recognized = 2/3 P3,000,000 = P2,000,000 Cost recognized = P1,200,000 Gross profit recognized = P2,000,000 P1,200,000 = P800,000 42. a Costs of construction Profit Construction In Progress Less: Progress billings Excess (Due from customers)

P1,200,000 800,000 P2,000,000 1,500,000 P 500,000

43. b Costs of construction Construction in progress Revenue for long-term contracts

600,000 400,000 1,000,000

Total revenue P3,000,000 revenue previously recognized P2,000,000 = Revenue to recognize this year P1,000,000. Cost recognized = P600,000 Gross profit recognized = P1,000,000 P600,000 = P400,000 44. d Costs of construction Revenue for long-term contracts

1,200,000 1,2000,000

Under cost recovery method, revenue should be recognized up to the extent of costs incurred. 45. b Costs of construction Profit Construction In Progress Less: Progress billings Excess (Due to customers)

P1,200,000 0 P1,200,000 1,500,000 P( 300,000)

46. d Costs of construction Construction in progress Revenue for long-term contracts

600,000 1,200,000 1,800,000

Under the cost recovery method, record equal amounts of revenue and cost until cost recovered, and then record gross profit. In 20x4, recorded revenue and cost of P1,200,000, so record remaining cost of P600,000 and all gross profit of P1,200,000 in 20x5. 47. a Contract price Costs incurred to date Add: Estimated cost to complete Total estimated costs Estimated Gross Profit (loss) Multiply by: % of completion Recognized Gross Profit (Loss) to date Less: Gross Profit (Loss) in prior year Recognized Gross Profit (Loss) in current year % of Completion / Cost Recovery Method: Construction in Progress

CI CI

4,920,000 4,680,000 3,720,000 7,920,000

20x4 P 9,600,000 P 4,920,000 4,920,000 P 9,840,000 P(240,000) 100% P (240,000) _________ P (240,000)

20x5 P10,080,000 P 8,640,000 2,160,000 P 10,800,000 P (720,000) 100% P (720,000) (240,000) P (480,000)

Progress Billings

240,000 loss

5,280,000 5,280,000 3,420,000

480,000 loss due to customers P780,000

8,700,000

Note: If there is an anticipated loss, the Construction-in-Progress for both methods will exactly be the same in the year the loss was incurred. 48. d Percentage of Completion: Contract price………………………….. Cost incurred each year………………. Add: Cost incurred in prior year……… Costs incurred to date………………… Add: Estimated costs to compute……. Total estimated costs………………….

Project 6 P500,000 P375,000 _________ P375,000 ________ P375,000

Project 7 P700,000 P100,000 ________ P100,000 400,000 P500,000

Project 8 P250,000 P100,000 ________ P100,000 100,000 P200,000

Estimated gross profit………………… Multiply by: percentage of completion. Recognized gross profit to date……… Less: Recognized gross profit in prior years Recognized gross profit each year….

P125,000 100% P125,000 _________ P125,000

P200,000 20% P 40,000 _________ P 40,000

P 50,000 50% P 25,000 _________ P 25,000

Project 6 P500,000*

Project 7 P100,000

Project 8 P100,000

375,000 P125,000

100,000 P 0

100,000 P 0

Cost Recovery Method of Construction Accounting:

Recognized Revenue………..……….. Less: Costs of long-term construction contract…………………………….. Recognized gross profit each year….

* Since the contract is completed then the full amount of P500,000 contract price should be recognized as revenue.

Percentage of Completion Construction in Progress Pr. 6 - Cl. 375,000 500,000 Pr. 6 Pr. 125,000 Pr. 7 – Cl. 100,000 Pr. 40,000 Pr. 8. Cl 100,000 Pr. 100,000 765,000 500,000 12/31 265,000 (d)

Cost Recovery Method of Construction Construction in Progress Pr. 6 - Cl. 375,000 500,000 Pr. 6 Pr. 125,000 Pr. 7 – CI 100,000 Pr. 8 – CI 100,000 700,000 500,000 12/31 200,000 (d)

49. a Input Measures: Efforts-Expended Method - using timbers laid Year 2 Timers laid Each Year 300 Add: Timbers laid in Prior Years 150 Timbers laid to date 450 Add: Additional support timbers to be laid 520 Total Estimated Timbers 970 Percentage-of-Completion 45/97 x: CONTRACT PRICE P 800,000 Recognized Revenue to Date P 371,134 Recognized Revenue in Prior Years Recognized Revenue in Current Yr.

Year 3 500 450 950 -0950 100% P 800,000 P 800,000 371,134 P 428,866

Output Measures – Number of trail feet Trail feet Each Year Add: Trail fees in Prior Years Trail feet to date Add: Additional trail feet to be constructed Total Estimated Trail feet Percentage-of-Completion x: CONTRACT PRICE Recognized Revenue to Date

Year 2 7,500 3,000 10,500 8,200 18,700 105/187 P 800,000 P 449,198

Year 3 8,000 10,500 18,500 ___-018,500 100% P 800,000 P 800,000

Recognized Revenue in Prior Years Recognized Revenue in Current Yr.

449,198 P 350,802

50. b Contract price………………………….. Cost incurred each year………………. Add: Cost incurred in prior year……… Costs incurred to date………………… Add: Estimated costs to complete Total estimated costs…………………. Estimated gross profit………………… Multiply by: percentage of completion. Recognized gross profit to date……… Less: Recognized gross profit in prior years Recognized gross profit each year….

2006 P5,000,000

P 900,000

P 100,000 -0P 100,000

2007 P5,000,000 900,000 P2,550,000 1,700,000 P4,250,000 P 750,000 60% P 450,000 100,000 P 350,000

2008 P5,000,000 P2,050,000 2,550,000 P4,600,000 -0P4,600,000 P 400,000 100% P 400,000 450,000 P( 50,000)

51. d – refer to No. 50 52. c Contract Price……………………………………………… Less: Total Estimated Costs Cost Incurred to Date……………………………… P26,000,000 Add: Estimated Costs to Complete……………… 25,000,000 Estimated Gross Profit……………………………………. Multiplied by: % of completion…………………………. Recognized gross profit to date……………………….. Less: RGP in prior years…………………………………… Recognized gross profit in current year……………… Construction-in-progress Account: Costs incurred to date………………………………….. GP in the current year…………………………………… Less: Progress billings…………………………………….. Due from customer (net)……………………………….

P60,000,000 51,000,000 P 9,000,000 30% P 2,700,000 _________0 P 2,700,000 P 26,000,000 2,700,000 P 28,700,000 5,000,000 P 23,700,000

53. c Contract Price Multiplied by: Gross Profit Rate Estimated Gross Profit of the entire contract Multiplied by: Percentage of Completion for first year Gross Profit realized for current year

P100,000,000 _________25% P 25,000,000 _________50% P 12,500,000

Contract Price x: Mobilization Fee Collection in 20x4 Note: Billings for 20x4 will be collected in January 20x5.

P120,000,000 10% P 12,000,000

54. c

55. a Mobilization Fee: 5% x P10M

P 5.0 M

Collection on Billings: Contract price x: Progress billings, net of 10% and 8% (50% - 10% - 8%) Progress billings x: Collections net of contract retention of 10% Collections in 20x4

P 100 M 32% P 32 M 90%

28.8 M P 33.8 M

56. b – cost recovery method is used. At the end of 20x4 the contractor must recognized only to the extent of recoverable contract costs incurred (i.e., P5,000 contract revenue and P5,000 construction costs/expenses). Quiz- VIII 1. P100,000 = [P900,000 ÷ (P900,000 + P1,800,000)] × P3,000,000 = P1,000,000 P1,000,000 – P900,000 = P100,000. 2. P150,000 Contract price Costs incurred to date Add: Estimated cost to complete Total estimated costs Estimated Gross Profit (loss) Multiply by: % of completion Recognized Gross Profit (Loss) to date Less: Gross Profit (Loss) in prior year Recognized Gross Profit (Loss) in current year

4,500,000 1,350,000 _2,700,000 4,050,000 450,000 1,350/4,050 150,000 ____-0150,000

3. P150,000 Contract price Costs incurred to date Add: Estimated cost to complete Total estimated costs Estimated Gross Profit (loss) Multiplied by: % of completion Recognized Gross Profit (Loss) to date Less: Gross Profit (Loss) in prior year Recognized Gross Profit (Loss) in current year

20x5 3,000,000

2,250,000 750,000 300,000

20x6 3,000,000 1,800,000 _600,000 2,400,000 600,000 1,800/2,400 450,000 _300,000 150,000

4. P80,000 Contract price Costs incurred to date Add: Estimated cost to complete Total estimated costs Estimated Gross Profit (loss) Multiplied by: % of completion Recognized Gross Profit (Loss) to date Less: Gross Profit (Loss) in prior year Recognized Gross Profit (Loss) in current year

20x5 1,600,000 240,000 _960,000 1,200,000 400,000 240/1,200 80,000 ______0 80,000

5. P20,000 Contract price Costs incurred each year Add: Cost incurred in prior years Costs incurred to date Add: Estimated cost to complete Total estimated costs Estimated Gross Profit (loss) Multiplied by: % of completion Recognized Gross Profit (Loss) to date Less: Gross Profit (Loss) in prior year Recognized Gross Profit (Loss) in current year

20x5 1,400,000 400,000 _____-0400,000 _400,000 800,000 600,000 400/800 300,000 ______0 300,000

20x6 1,400,000 400,000 400,000 800,000 200,000 1,000,000 400,000 800/1,000 320,000 300.000 20,000

6. P-0- , Under the cost recovery method, record equal amounts of revenue and cost until cost recovered, and then record gross profit 7.P240,000 Profit Contract price Costs incurred each year Add: Cost incurred in prior years Costs incurred to date Add: Estimated cost to complete Total estimated costs Estimated Gross Profit (loss) Multiplied by: % of completion Recognized Gross Profit (Loss) to date Less: Gross Profit (Loss) in prior year Recognized Gross Profit (Loss) in current year

20x5 4,000,000 960,000 _______0 960,000 3,200,000 800,000 960/3,200 240,000 _______0 240,000

8. P102,000 Contract price Costs incurred each year Add: Cost incurred in prior years Costs incurred to date Add: Estimated cost to complete Total estimated costs Estimated Gross Profit (loss) Multiplied by: % of completion Recognized Gross Profit (Loss) to date Less: Gross Profit (Loss) in prior year Recognized Gross Profit (Loss) in current year

20x5 850,000 238,000 _______0 238,000 357,000 595,000 255,000 238/595 102,000 _______0 102,000

9. P990,000 Contract price Costs incurred each year Add: Cost incurred in prior years Costs incurred to date* Add: Estimated cost to complete Total estimated costs Estimated Gross Profit (loss) Multiplied by: % of completion Recognized Gross Profit (Loss) to date Less: Gross Profit (Loss) in prior year Recognized Gross Profit (Loss) in current year

20x5 3,000,000

450,000

20x6 3,000,000 990,000 450,000 1,440,000

2,250,000 750,000 ____20% 150,000 ______0 150,000

2,400,000 600,000 _____60% 360,000 150.000 210,000

* total estimated costs x % of completion

10. P50,000 20x5 1,500,000 465,000 _______0 465,000 1,085,000 1,550,000 ( 50,000) 100% ( 50,000) _______0 ( 50,000)

Contract price Costs incurred each year Add: Cost incurred in prior years Costs incurred to date Add: Estimated cost to complete Total estimated costs Estimated Gross Profit (loss) Multiplied by: % of completion Recognized Gross Profit (Loss) to date Less: Gross Profit (Loss) in prior year Recognized Gross Profit (Loss) in current year 11. P625,000 Contract price Costs incurred each year Add: Cost incurred in prior years Costs incurred to date Add: Estimated cost to complete Total estimated costs Estimated Gross Profit (loss) Multiplied by: % of completion Recognized Gross Profit (Loss) to date Less: Gross Profit (Loss) in prior year Recognized Gross Profit (Loss) in current year

20x5 3,500,000 1,350,000 -01,350,000 1,350,000 2,700,000 800,000 -0-0-

20x6 3,500,000 1,525,000 1,350,000 2,875,000 _______0 2,875,000 625,000 ___100% 625,000 _______0 625,000

12. P550 Costs Incurred………………………………………………………………………. Contract price………………………………………. Cost incurred each year………………………….. Add: Cost incurred in prior year…………………. Costs incurred to date…………………………….. Add: Estimated costs to complete……………… Total estimated costs………………………………. Estimated gross profit (loss)………….……………. Multiplied by: percentage of completion……….. Construction In Progress account – inventory account……………………

400 P2,750 P 400 ___-0P 400 _1,600 P2,000 P 750 400/2,000

150 550

13. P1,200,000 The term “completed” should be “cost recovery” Costs Incurred Contract price………………………………………. Cost incurred each year………………………….. Add: Cost incurred in prior year…………………. Costs incurred to date…………………………….. Add: Estimated costs to complete……………… Total estimated costs………………………………. Estimated gross profit (loss)………….……………. Multiplied by: percentage of completion……….. Construction In Progress account – inventory account

700,000 P2,000,000 P 700,000 ______-0P 700,000 __800,000 P1,500,000 P 500,000 ________0

_______0 700,000

20x5 Costs incurred Contract price………………………………………. Cost incurred each year………………………….. Add: Cost incurred in prior year…………………. Costs incurred to date…………………………….. Add: Estimated costs to complete……………… Total estimated costs………………………………. Estimated gross profit (loss)………….……………. Multiplied by: percentage of completion……….. Construction In Progress account – inventory account

14. P32,000 = P47,000 – P15,000

600,000 P2,000,000 P 600,000 _700,000 P1,300,000) __800,000 P(2,100,000) P (100,000) ________0

_(100,000) 1,200,000

15. P782,000 20x5 Costs Incurred Contract price………………………………………. Cost incurred each year………………………….. Add: Cost incurred in prior year…………………. Costs incurred to date…………………………….. Add: Estimated costs to complete……………… Total estimated costs………………………………. Estimated gross profit (loss)………….……………. Multiplied by: percentage of completion……….. Construction In Progress account – inventory account

238,000 P850,000 P238,000 ______-0P238,000 _357,000 P595,000 P255,000 _238/595

102,000 340,000

20x6 Costs incurred Contract price………………………………………. Cost incurred each year………………………….. Add: Cost incurred in prior year…………………. Costs incurred to date…………………………….. Add: Estimated costs to complete……………… Total estimated costs………………………………. Estimated gross profit (loss)………….……………. Multiplied by: percentage of completion……….. Construction In Progress account – inventory account Less: Progress billings (P260,000 + P210,000) Construction In Progress account (net) – Due from customers

319,600 P850,000 P319,600 _238,000 P557,600 _139,400 P697,000 P153,000 _557.6/697

_122,400 782,000 470,000 312,000

16. P312,000 17. same with no.16 – P312,000 18. (P9,000,000 – P8,250,000)  (P3,795,000 ÷ P8,250,000) = P345,000. 19.P3,795,000 + P345,000 = P4,140,000. 20. P2,750,000 P1,650,000 ————— × P5,000,000 = P2,750,000 P3,000,000 21. 22.

Accounts Receivable ............................................................................... Billings on Construction in Process ...........................................

1,650,000

Construction Expenses ............................................................................. Construction in Process ............................................................................ Revenue from Long-Term Contracts .......................................

1,650,000 1,100,000

23. P875,000 Revenue Costs Total gross profit Recognized in 20x5 Recognized in 20x6 Or Total revenue Recognized in 20x5

P5,000,000 3,025,000 1,975,000 (1,100,000) P 875,000 P5,000,000 (2,750,000)

1,650,000

2,750,000

Recognized in 20x6 Costs in 20x6 Gross profit in 20x6

24. 25. 26.

20x5 20x6 20x7

2,250,000 (1,375,000) P 875,000

Percentage-of-Completion Gross Profit P750,000a P210,000b P440,000c

20x5 20x6 20x7

Completed-Contract Gross Profit — — P1,400,000d

aP1,500,000

————— × P2,000,000 = P4,000,000

P750,000

bP2,640,000

————— × P1,600,000 = P4,400,000

P960,000

Less 20x5 gross profit 20x6 gross profit

(750,000) P210,000

cTotal

revenue Total costs Total gross profit Recognized to date 20x7 gross profit

dTotal

revenue Total costs Total gross profit

P6,000,000 4,600,000 1,400,000 (960,000) P 440,000 P6,000,000 4,600,000 P1,400,000

27. P312,500 Revenue

= [P250,000/(P250,000 + P750,000)] P1,250,000 = P312,500 Gross profit = P312,500 P250,000 = P62,500 Construction in progress = P250,000 + P62,500 = P312,500

28. P125,000 (2) Current Assets Inventories Construction in progress* P1,000,000 Less: Partial billings** (875,000) Costs and recognized profit not P 125,000 yet billed *Revenue to date = (P250,000 + P600,000)/(P250,000 + P600,000 + P212,500) 1,250,000 = P1,000,000 Construction in progress = P250,000 + P600,000 + P150,000 = P1,000,000 **Partial billings = P375,000 + P500,000 = P875,000

29. P60,00 Revenue to date Revenue from previous periods Revenue for 20x7 Costs incurred in 20x7 Gross profit for 20x7

P1,250,000 _1,000,000 P 250,000 _ 190,000 P 60,000

THEORIES 1. 2. 3. 4. 5.

36.

False True True False False

6. 7. 8. 9. 10,

False False False True False

11. 12. 13. 14. 15,

False True False True False

16. 17. 18. 19. 20.

True False True False True

21. 22. 23. 24. 25.

True False False False False

26. 27. 28. 29. 30.

True True False False True

31. 32. 33. 34. 35.

37. 38. 39. 40.

False True True False False

41.

b

46.

a

51.

c

56.

d

61.

d

66.

c

42. 43. 44. 45.

c

47. 48. 49. 50.

d

52. 53. 54. 55.

b c b

57. 58. 59. 60.

b

62. 63. 64. 65.

b a c d

67. 68. 69. 70.

b

b c b

c

c a

a

c

c c

a

d C

False False True False True