Long Term Construction Contracts

SPECIAL REVENUE RECOGNITION LONG TERM CONSTRUCTION CONTRACTS

Long Term Construction Contracts H101 1. Binay Construction Company has contracted to build the Makati City Hall Building. The construction is scheduled to begin on January 1, 2015, and the estimated time of completion is July 1, 2018. The building cost is estimated to be P50 million and this will be billed a t P55 million. The following relates to the construction period:

Cost to date Estimated cost to complete Progress Billings to date Cash collected to date a. b.

2.

2015 15,000,000 35,000,000 7,000,000 7,000,000

2016 25,000,000 25,000,000 20,000,000 18,000,000

2017 35,000,000 15,000,000 35,000,000 30,000,000

2018 50,000,000 55,000,000 55,000,000

Compute for the revenue, costs and realized gross profit at each year. year. Prepare the entries for these transactions.

Junjun Company was recently awarded a P14 million contract to construct a shopping mall for SM, Inc. Junjun estimates it will take 3 years and 6 months to complete the contract. The company uses cost-to-cost method to assume profits. The following information details the actual and estimated costs for the year 2015-2018: Year 2015 2016 2017 2018 a. b.

3.

Actual Costs 6,500,000 3,300,000 2,400,000 1,700,000

Estimated Cost to Complete 6,800,000 3,900,000 1,900,000 -0-

Compute for the revenue, costs and realized gross profit at each year. year. Prepare the entries for these transactions.

Noynoy Construction Company is a contractor for the construction of large office buildings. At the beginning of 2018, three buildings were in progress. The following date relates to three buildings at the beginning of beginning of the year:

Building 1 Building 2 Building 3

Contract Price 4,000,000 9,000,000 13,150,000

Costs incurred 2,070,000 6,318,000 3,000,000

Estimated Cost to complete 1,380,000 1,782,000 9,000,000

During 2018, the following costs were incurred: Costs incurred Estimated cost to complete (December 31, 2018) Building 1: 930,000 750,000 Building 2: 1,800,000 Job Completed Building 3: 7,400,000 2,800,000 Building 4: 800,000 1,200,000 (Contract Price: 2,500,000) a. b.

Revenue, Revenue, costs and gross profit in 2018 using percentage of completion. Gross profit using zero profit method.

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4.

Napoles Company is a contractor for the construction of large office buildings. At the beginning of 2018, one building is in progress. The following described the status of the building at the beginning of the year: Contract price Costs incurred to January 1, 2018 (including P50,000 worth of materials stored at the site to be used in 2019 to complete the project) Estimated costs to complete, January 1, 2018

6,300,000

1,425,000 4,075,000

During 2018, the following data were obtained with respect to the same building: Costs incurred to date 3,040,000 Cost to complete, December 31, 2018 1,960,000 a.

5.

Realized gross profit(loss) to be reported for the year 2018 using the percentage of completion and zero – profit.

In 2018, DMCI was contracted by PNoy to build a bridge for P 150 million. The project to be completed in two years and the contract provided for: 10% mobilization fee (to be deducted from the last billing) payable within 15 days after the assigning of the contract 10% retention provision on all billings Payment of progress billing within 10 days from acceptance 

 

DMCI uses percentage of completion, estimated a 25% gross margin on the project. By the end of 2018, DMCI had presented progress billings corresponding to 50% completion. All of the progress billings presented in 2018 were accepted, except the last one for 10% which was accepted on January 5, 2018. With the exception of one bill for 8% which was due on January 7, 2019, all of the billings accepted in 2018 were settled. Payments made by PNoy in 2018 amounted to: a. 33.8 million b. 58.2 million c. 82.5 million d. 59 million

6.

On January 1, 2018, a fire destroyed the office building of Zeus and destroyed all the files in the accountant’s desk. The president of the company contracted you to help reconstruct the information. The following date were taken from the salvage files: December 31, 2016 December 31, 2017 Estimated costs to complete 1,556,250 1,000,000 Cost incurred 462,500 Percentage of completion 60% RGP to date 62,500 150,000 What is the estimated gross profit as of 2016 of this contract? a. 312,500 b. 156,250 c. 208,333

7.

d. 250,000

On August 1, 2018, Athena obtained a contract to construct a building. The building was estimated to be built at a total cost of P7,500,000 and is scheduled for completion on October 2020. The contract contains a penalty clause to the effect that the other party was to deduct P35,000 from the contract price for each week of delay. Completion was delayed for 5 weeks. Furthermore, the contract also stipulated that once there was an unexpected increase in costs, the contract shall be modified by an amount equal to 100% of the increase subject to the approval and evaluation of the client. In 2019, the estimated costs of particular construction material amounting to P520,000 were bought for P780,000. The increase in the contract price related to this cost escalation was approved by the client. The records show: 2018 2019 2020__ Cost incurred 1,750,000 6,440,000 1,085,000 Estimated cost to complete 7,000,000 910,000 -Progress billings 1,400,000 15,225,000 4,200,000 Using percentage of completion method, compute for the following: a. Realized gross profit or (loss) in 2018, 2019, 2020 b. Construction in Progress as of 2019 c. Due from/ due to customer as of 2018 and 2019

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8.

Poseidon Construction Company recently acquired the Percy Company. Percy has incomplete accounting records on one particular project, below are the only information available: 2016 2017 2018__ Cost incurred P 1,000,000 1,250,000 ? Estimated cost to complete 2,250,000 950,000 -Recognized revenue 1,100,000 ? ? Realized gross profit on contract ? 50,000 (50,000) Contract Price P 3,500,000 Percy Company uses the percentage of completion method and the percentage of work completed is determined through surveys of work performed (engineer’s estimates). Compute the realized gross profit to be recognized in 2016, revenue reported in 2017 and cost incurred in 2018. a. b.

9.

250,000; 2,400,000; 2,250,000 100,000; 1,300,000; 1,150,000

c. 1,100,000; 1,300,000; 2,250,000 d. 1,000,000; 2,400,000; 3,400,000

Hercules Builders has entered into a very profitable fixed price contract for constructing a high – rise building over a period of three years. It incurs the following costs relating to the contract during t he first year: Cost of material – P 25 million Site Labor cost, including supervision of 2 million – P 20 million Agreed administrative costs per contract to reimbursed by customer – P 10 million Depreciation of the paint used for the construction – P 2 million Insurance costs (2/3 for the other project) – P 6 million Marketing costs for selling apartments when they are ready – P 10 million Depreciation of idle equipment not us ed on particular contract – P 2 million Selling costs – P 3 million Borrowing costs incurred during the construction period – P 1 million Advances made to subcontractors – P 20 million Cost incurred in obtaining the contract previously written off – P 1.5 million Total estimated cost of the project – P 180 million The percentage of completion at the end of the year: a. 33% b. 28% c. 25% d. 39%

10. On July 1, 2018, Atlas Construction Company contracted to build an office building for a total contract price of P 975,000. 2016 2017 2018__ Costs incurred to date P75,000 P600,000 P1,050,000 Estimated costs to complete 675,000 400,000 -Billings 150,000 550,000 275,000 How much is the Construction in progress account balance at December 31, 2017 using the percentage of completion? a. 900,000 b. 575,000 c. 825,000 d. 350,000

11. On July 1, 2017, Centaur Construction Company contracted to build an office building for Harry Potter for P 3,900,000 2017 2018 2019_ _ Costs incurred to date P 300,000 P 2,400,000 P4,200,000 Estimated costs to complete 2,700,000 1,600,000 -Billings to Harry Potter 600,000 2,200,000 1,100,000 How much is the CIP account balance at December 31, 2018 using POC method? How much is the CIP, net of billings at December 31, 2018, using the zero profit method? How much is the realized gross profit/(loss), using percentage of completion method in 2019? a. b. c. d.

2,300,000; 2,390,000; 2,300,000; 2,300,000;

100,000; 100,000; (500,000); (500,000);

(300,000) (200,000) (300,000) (200,000)

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12. Medusa Corporation entered in a long term project in 2017 and continued through 2018. The company has available dependable and reliable estimates. As of 2018, Medusa billed 2/5 of the total contract price. Some other information about the project were as follows: 2017 2018 Construction cost to date P 148,750 P 420,000 Excess of Construction in Progress Over billings – due from/ (due to) 38,750 (61,250) Contract billings 145,000 612,500 Collections from the contract 135,000 437,500 Compute for POC:

a. 28%

b. 12%

c. 36%

d. 44%

13. On January 2017, Green Arrow Company began constructing a P 10,500,000 contract. As of year – end, the record shows: 2017 2018 2019_ _ Construction in Progress P2,205,000 P6,746,250 ? Estimated costs to complete 7,998,750 3,753,750 -Costs incurred 2,126,250 4,845,000 P3,378,750 How much is the realized gross profit in 2018 using the POC method and realized gross profit in 2019 using zero profit method? a. (146,250); 291,750 c. (225,000); 375,000 b. (303,750); 0 d. (303,750; 375,000)

14. The Flash Company enters into a contract with Hulk Corporation to construct a 10 – storey building for P 8 million. The following data were taken from the Company’s files: 2017 2018__ Cost incurred P --P 3,136,418 Percentage of completion --60% Estimated costs to complete 6,004,024 3,091,616 Income recognized to date 98,994 162,576 What is the POC as of 2017 of this construction contract? a. 20% b. 35% c. 40% d. 25%

15. On January 15, 2016, Thor Company won a bidding to build an athletic stadium. The project was to be built at a total cost of 5,500,000 and was scheduled for completion by September 1, 2018. One clause of the contract stated that Thor was to deduct 15,000 from the 6,600,000 bid price for each week that completion was delayed. Completion was delayed six weeks. Data for the three years are as follows:

Cost incurred Estimated costs to complete Contract billings each year Cash Collections each year Operating expenses

2016 1,782,000 3,618,000 1,200,000 1,000,000 100,000

2017 2,068,000 1,650,000 1,900,000 1,800,000 90,000

2018__ 1,650,000 -? 3,710,000 70,000

Find the (1) Net Income for the year 2017 using POC, (2) balance of Construction in Progress, net of Progress Billings at December 31, 2017 using POC and (3) balance of Construction in Progress, net of Progress Billings in 2017 using zero profit method. a. 284,000; 1,520,000; 750,000 b. 374,000; 1,784,500; 520,000 c. 248,000; 1,520,500 450,000 d. 743,000; 1,250,000; 570,000

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