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1. The primary issuein accounting for construction contracts is

a. the determination of percentage of completion and proper determination of 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. A construction contract may be

a. fixed price contract c. a combination of a and b
b. cost plus contract. d. any of these

3. VALEDICTION Construction Co. entered into a P80M 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 P40M. The following were the actual costs
incurred by VALEDICTION during 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 construction equipment 240,000
Costs of moving plant, equipment and materials to and
from the contract site 160,000
Costs of hiring plant and equipment 560,000
Advance payments to subcontractors (subcontracted
work is not yet started) 80,000

What is the percentage of completion of the contract as of the end of the first year?
a. 42% b. 45% c. 50% d. 46%

4. On Oct. 1, 20x1, ABC Co. enters into a construction contract with a customer. The performance
obligation in the contract will be satisfied over time. ABC Co. uses the “cost-to-cost” method in
measuring its progress. The estimated total contract cost is ₱10M. In 20x1, ABC Co. incurred a
total cost of ₱6M, which includes ₱2M advance payment to a subcontractor (the subcontracted
work is not yet started) and ₱200,000 cost of materials not yet installed. ABC Co. does not regard
the cost of the unused materials as significant in relation to the expected total contract costs.
Moreover, ABC Co. retains control over the unused materials because it can use them in a
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contract with another customer. The contract price is ₱20M. How much is the revenue
recognized in 20x1?
a. 7,600,000
b. 12,000,000
c. 8,200,000
d. 11,600,000

5. On January 1, 20x1, ABC Co. enters into a contract with a customer for the construction of a
building. The contract price is ₱1,000,000. The following are the transactions during 20x1:
 At contract inception, the customer makes an advance payment of ₱100,000 as facilitation
fee.
 ABC Co. incurs total contract costs of ₱300,000 during the period.
 The estimated costs to complete as of year-end amounts to ₱500,000.
 ABC Co. collects the billing, net of 10% retention by the customer to be used to rectify any
unsatisfactory work determined at the completion of the contract.

How much is the gross profit earned from the contract in 20x1?
a. 75,000
b. 82,000
c. 375,000
d. 482,000

Use the following information for the next three cases (three questions per case):
In 20x1, ABC Co. enters into a construction contract with a customer. The contract price is
₱10,000,000. Information on the contract follows:
20x1 20x2 20x3
Costs incurred to date 2,400,000 4,500,000 6,000,000
Estimated costs to complete 3,600,000 1,500,000 -

Case #1:
At contract inception, ABC Co. assesses its performance obligations in the contract and concludes
that it has a single performance obligation that is satisfied over time. ABC Co. determines that the
measure of progress that best depicts its performance on the contract is “cost-to-cost” method.

6. How much is the revenue recognized in 20x1?

a. 4,200,000
b. 4,000,000
c. 2,800,000
d. 3,500,000

7. How much is the cost of construction recognized as expense in 20x2?

a. 2,100,000
b. 2,400,000
c. 3,800,000
d. 1,500,000
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8. How much is the gross profit recognized in 20x3?

a. 1,000,000
b. 1,500,000
c. 2,100,000
d. 2,800,000

Case #2:
At contract inception, ABC Co. assesses its performance obligations in the contract and concludes
that it has a single performance obligation that is satisfied over time. However, ABC Co. determines
that the outcome of the performance obligation cannot be reasonably measured but expects to
recover the contract costs incurred.

9. How much is the revenue recognized in 20x1?

a. 4,200,000
b. 4,000,000
c. 2,400,000
d. 0

10. How much is the cost of construction recognized as expense in 20x2?

a. 2,100,000
b. 2,400,000
c. 3,800,000
d. 0

11. How much is the gross profit recognized in 20x3?

a. 5,500,000
b. 1,500,000
c. 4,000,000
d. 2,100,000

Case #3:
At contract inception, ABC Co. assesses its performance obligations in the contract and concludes
that it has a single performance obligation.

In its determination of the satisfaction of the performance obligation, ABC Co. identifies that, during
the construction period, ABC Co. retains control over the asset created in the contract. This
precludes the customer from simultaneously receiving and consuming the benefits provided by
ABC Co.’s performance as ABC Co. performs. Moreover, the asset created in the contract has an
alternative use to ABC Co. because, in case the contract is cancelled, ABC Co. retains ownership over
any asset created and can direct that asset for another use without significant modification or cost.
Accordingly, ABC Co. concludes that the performance obligation is satisfied at a point in time.
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ABC Co. determines the point in time when the performance obligation is satisfied using the
principles in PFRS 15 and concludes that the performance obligation is satisfied only when the
construction is completed and the control over the promised good is transferred to the customer.

12. How much is the revenue recognized in 20x1?

a. 4,200,000
b. 4,000,000
c. 2,400,000
d. 0

13. How much is the cost of construction recognized as expense in 20x2?

a. 2,100,000
b. 2,400,000
c. 3,800,000
d. 0

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

a. 5,500,000
b. 1,500,000
c. 4,000,000
d. 2,100,000

15. ABC Co. started work on two separate projects during 20x1. Information on these projects is
shown below:

Estimated costs to
Project Contract price Costs incurred complete Progress billings
A 9,000,000 4,000,000 2,000,000 5,000,000
B 8,000,000 5,000,000 - 8,000,000

How much is the total balance of the “construction in progress” accounts as of December 31, 20x1
under percentage of completion method?
a. 4,000,000
b. 6,000,000
c. 14,000,000
d. 0

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

- END -

SOLUTIONS:
1. B
2. D

3. Solution:
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The total costs incurred to date are computed as follows:

Costs of materials used in construction 12,000,000
Site labor costs 4,000,000
Site supervision costs 800,000
Depreciation of equipment used in construction 480,000
Costs of moving plant, equipment and materials to and
from the contract site 160,000
Costs of hiring plant and equipment 560,000
Total costs incurred to date 18,000,000

The percentage of completion as of the end of the first year is computed as follows:
Total costs incurred to date
Percentage of completion =
Estimated total contract costs
Percentage of completion = 18,000,000 ÷ 40,000,000
Percentage of completion = 45%

4. Solution:
Percentage of completion = (6M – 2M – 200K) ÷ 10M
Percentage of completion =(3.8M ÷ 10M) =38%
38% x 20M = 7.6M

5. A Solution:
Total contract price 1,000,000
(a) Costs incurred to date 300,000
Estimated costs to complete 500,000
(b) Estimated total contract costs 800,000
Expected gross profit from contract 200,000
Multiply by: Percentage of completion (a) ÷ (b) 37.50%
Gross profit earned to date 75,000
Less: Gross profit earned in previous years -
Gross profit for the year 75,000

6. B (see solutions below)

7. A (see solutions below)
8. A

Solutions:
20x1 20x2 20x3
Total contract price 10,000,000 10,000,000 10,000,000
Costs incurred to date (a) 2,400,000 4,500,000 6,000,000
Estimated costs to complete 3,600,000 1,500,000 -
Estimated total contract costs (b) 6,000,000 6,000,000 6,000,000
Expected profit (loss) 4,000,000 4,000,000 4,000,000
Multiply by: % of completion (a) ÷ (b) 40% 75% 100%
Profit (loss) to date 1,600,000 3,000,000 4,000,000
Profit recognized in prior years - (1,600,000) (3,000,000)
Profit (loss) for the year 1,600,000 1,400,000 1,000,000
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20x1 20x2 20x3

Total contract price 10,000,000 10,000,000 10,000,000
Multiply by: % of completion 40% 75% 100%
Contract revenue to date 4,000,000 7,500,000 10,000,000
Contract revenue in prior yrs. - (4,000,000) (7,500,000)
Contract revenue for the year 4,000,000 3,500,000 2,500,000
Cost of construction (a) (2,400,000) (2,100,000) (1,500,000)
Profit (loss) for the year 1,600,000 1,400,000 1,000,000

9. C (see solutions below)

10. A (see solutions below)
11. C

Solutions:
20x1 20x2 20x2
Contract revenue to date (a) 2,400,000 4,500,000 10,000,000
Contract revenue in prior yrs. - (2,400,000) (4,500,000)
Contract revenue for the year 2,400,000 2,100,000 5,500,000
Cost of construction (b) (2,400,000) (2,100,000) (1,500,000)
Profit (loss) for the year - - 4,000,000

The “contract revenue to date” in 20x1 and 20x2 are equal to the costs incurred to date. However, the contract
(a)

revenue to date in 20x3 is the transaction price of ₱10,000,000 because the contract is 100% complete.
The revenues recognized in 20x1 and 20x2 are equal to the recoverable costs incurred during those years. In
20x3, when the construction is completed, the revenue recognized is the transaction price adjusted for the revenues
recognized in the previous years.

(b) “Costof construction” is equal to the costs incurred during the period. In 20x2 and 20x3, the costs of construction are computed as
“costs incurred to date” minus “costs incurred in prior years: 20x2: (4.5M – 2.4M = 2.1M) and 20x3: (6M – 4.5M = 1.5M).

12. D (see solutions below)

13. D (see solutions below)
14. C

Solutions:

20x1 20x2 20x3

Contract revenue to date (a) - - 10,000,000
Contract revenue in prior years - - -
Contract revenue for the year - - 10,000,000
Cost of construction (b) - - (6,000,000)
Profit (loss) for the year - - 4,000,000

No revenue is recognized during the construction period because the performance obligation is satisfied at a point
(a)

in time. The whole of the transaction price is recognized as revenue only in 20x3 when the construction is completed
and the control over the promised good is transferred to the customer.
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The costs incurred each year during the construction period are deferred and recognized in full only in 20x3 when
(b)

the related revenue is recognized.

15. B Solution:

Profit (loss) for the year is computed as follows:

Project A B
Total contract price 9,000,000 8,000,000
(a) Costs incurred to date 4,000,000 5,000,000
Estimated costs to complete 2,000,000 -
(b) Estimated total contract costs 6,000,000 5,000,000
Expected profit (loss) 3,000,000 3,000,000
Multiply by: % of completion (a) ÷ (b) 67% 100%
Profit (loss) to date 2,000,000 3,000,000
Profit in previous years - -
Profit (loss) for the year 2,000,000 3,000,000

The balances in construction in progress accounts as of December 31, 20x1 under percentage of
completion are determined as follows:
CIP – A CIP – B
Costs incurred 4,000,000 5,000,000
Profit 2,000,000 3,000,000 8,000,000 *
6,000,000 -

*Since project B is 100% complete, it is assumed that the completed project was turned over to the
customer.