PRACTICAL ACCOUNTING 2 (SY.

2017 – 2018) – LONG-TERM CONSTRUCTION CONTRACTS

NAME: ___________________________________________ DATE: _____________________

1. Cord Builders, Inc. has consistently used the percentage of completion method of
accounting for construction type contracts. During 2008, Cord started work on a
P9,000,000 fixed price construction contract that was completed in 2010. Cord’s
accounting records disclosed the following:
December
2008 2009
Cumulative contract costs incurred P3,900,000 P6,300,000
Estimated total cost at completion 7,800,000 8,100,000

How much income would Cord have recognized on this contract for the year ended
December 31, 2009?
a. P100,000 b. P300,000 c. P600,000 d. P700,000

2. Mill Construction Co. uses the percentage of completion method of accounting. During
2009, Mill constructed to build an apartment complex for Drew for P20,000,000. Mill
estimated that total costs would amount to P16,000,000 over the period of
construction. In connection with this contract, Mill incurred P2,000,000 of
construction cost during 2009. Mill billed and collected P3,000,000 from Drew in 2009.
What amount should Mill recognize as gross profit for 2009?
a. P250,000 b. P375,000 c. P500,000 d. P600,000

3. The following data relate to a construction job started by Worthington Co. during
2009:

Total contract price P300,000

Actual costs incurred during 2009 60,000
Estimated remaining costs 120,000
Billed to customer during 2009 90,000
Received from customer during 2009 30,000

Under the percentage of completion method, how much should Worthington recognize as
gross profit for 2009?
a. P 0 b. P40,000 c. P80,000 d. P100,000

4. C & J Construction, Inc. consistently used the percentage of completion method of

recognizing income. Last year C & J started work on a P4,500,000 construction
contract, which was completed this year. The accounting records disclosed the
following data for last year:

Progress billings P1,650,000

Cost incurred 1,350,000
Collections 1,050,000
Estimated cost to complete 2,700,000

How much revenue should C % J recognize on this contract last year?

a. P105,000 b. P150,000 c. P300,000 d. P350,000

5. The following data pertains to Pell Co.’s construction jobs, which commenced during
2009:
Project 1 Project 2
Contract price P420,000 P300,000
Cost incurred during 2009 240,000 280,000
Estimated cost to complete 120,000 40,000
Billed to customers during 2009 150,000 270,000
Received from customers during 2009 90,000 250,000

If Pell used the percentage of completion method, what amount of gross profit (loss)
would Pell report in its 2009 income statement?
a. P50,000 b. P108,000 c. P128,000 d. P228,000

6. Chicane Builders Inc, employs the cost-to-cost method in determining the percentage of
completion for revenue recognition. The company’s records show the following
information on a recently completed project for a contract price of P5,000,000.

2005 2006 2007

Cost incurred to date P900,000 P2,550,000 P ?
Gross profit (loss) 100,000 350,000 (50,000)

Complete the (1) estimated costs to complete the project at December 31, 2006, and (2)
the actual cost incurred during the year 2007:
a. (1)P1,700,000; (2)P2,550,000 c. (1)P 850,000; (2)P2,050,000
b. (1)P1,700,000; (2)P2,050,000 d. (1)P1,700,000; (2)P2,200,000
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7. Breakeven Corp was contracted to construct a warehouse for a price of P34,000,000.

Information below were provided by Breakeven:

2013 2014 2015

Cost incurred to date P14,625,000 P25,687,500 P33,750,000
Estimated cost at completion 32,500,000 34,250,000 -

How much is the realized gross profit/loss during 2014?

a. (P925,000) b. P250,000 c. (P250,000) d. P925,000

8. Bonifacio contractors had a 3-year construction contract in 2012 for P900,000. The
company uses the percentage-of-completion method for financial statement purposes.
Income to be recognized each year is based on the ratio of cost incurred to total
estimated cost to complete the contract. Data on this contract follows:

Accounts receivable – construction contract billings P30,000

Construction in progress 93,750
Less: Amounts billed 84,375
10% retention 9,375
Net income recognized in 2012 (before tax) 15,000

Bonifacio Contractors maintains a separate bank account for each construction

contract. Bank deposits to this contract amounted to P50,000.

What was the estimated total income before tax on this contract?
a. P45,000 b. P94,000 c. P135,000 d. P144,000

9. Mega Construction Company was awarded a contract to construct a new sewage system for
MWSS for a price of P3,250,000. The original estimate of the cost to complete the
project was P3,000,000. The contract provides for periodic progress billings. A final
equal to 25% of the contract price is to be made upon final inspection and acceptance
by the MWSS.

The construction record for the system was as follows:

Cost incurred to date Estimated cost to complete

Dec. 31, 2011 P1,075,000 P1,612,500
Dec. 31, 2012 2,625,000 750,000
Aug. 15, 2013 3,425,000

The construction was inspected on August 15, 2011, January 15, 2012 and Oct. 1, 2012,
and progress billings equal to 25% of the contract price were made on each of these
dates. The system was completed, and final inspection and acceptance took place on
August 21, 2013.

How much is the construction in progress, net of billings in the 2012?

a. P875,000 current liability c. P287,500 current liability
b. P2,463,600 current asset d. P62,500 current assets

10. Cebu Construction Company began operation on January 2, 2013. During the year, the
company entered into a contract with Tommy Company to construct a manufacturing
facility. At that time, Cebu Company estimated that it would take five years to
complete the facility at a total cost of P1,800,000. The total contract price for
construction of the facility is P2,500,000. During the year, the company incurred
P440,000 in construction costs related to the construction project. The estimated
cost to complete the contract is P1,560,000. Tommy was billed and paid 30% of the
contract price subject to a 10% retention.

Using the percentage of completion method, how much is the excess of Construction in
Progress over Contract Billings or Contract Billings over Construction in Progress?
a. P200,000 current asset c. P200,000 current liability
b. P125,000 current liability d. P125,000 current asset

11. Marlboro Construction Inc. entered into a construction contract in 2012 that called
for a contract price of P9,600,000. At the beginning of 2013, a change order
increased the initial contract price by P480,000. The company uses the percentage of
completion method for completing the project. The following data is available:

2012 2013
Cost incurred to date P4,920,000 P8,640,000
Estimated costs to complete 4,920,000 2,160,000

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What gross profit (loss) should Marlboro Corporation recognize in 2012 and 2013?
2012 2013 2012 2013
a. (P240,000) (P720,000) c. P240,000 (P960,000)
b. (P240,000) (P480,000) d. P240,000 (P720,000)

12. East Builders works on a P70 million contract in 2013 to construct a shopping mall
for SM Inc. During 2013, East Builders uses the percentage of completion method of
revenue recognition. At December 31, 2013, the account balances were:

Construction in progress P24.55 million

Accounts receivable 2.4 million
Contract billings 12.0 million
Estimated costs to complete 31.85 million

How much is the actual costs incurred in 2013?

a. P24.5 million b. P49 million c. P7.5 million d. P17.150 million

13. On July 1, 2011, Summer Construction Corporation contracted to build an office

building for JG Inc., for a total price of P975,000. Data relating to the project
from 2011 to 2013 are as follows:

2011 2012 2013

Contract cost incurred to date P75,000 P600,000 P1,050,000
Estimated costs to complete 675,000 400,000 -
Billings to JG Inc. 150,000 550,000 275,000

Summer Construction Corp. uses the Zero Profit Method.

What is the balance of the Construction in Progress account net of billings at

December 31, 2012?
a. P125,000 due to JG Inc. c. P25,000 due from JG Inc.
b. P125,000 due from JG Inc. d. P25,000 due to JG Inc.

14. Using the data in Number 13. Assuming the uses of the Percentage of Completion
method, how much is the gross profit (loss) to be recognized in 2012?
a. (P47,500) b. P47,500 c. (P22,500) d. P22,500

15. North Construction Company uses the percentage of completion method of recognizing
gross profit on long term construction contracts. The company started work on two
contracts during 2012. Data relating to the two contracts are given below:

Actual cost Estimated Cost

Contract price 12/31/2012 to Complete
Contract 1 P1,800,000 P450,000 P450,000
Contract 2 1,350,000 262,500 487,500

In 2013, contract 3 was started for a contract price of P2,700,000. As of December

31, 2013, the following data are available:

Actual cost
1/1/2012 to 12/31/2013 Estimated Cost to Complete
Contract 1 P840,000 P210,000
Contract 2 540,000 360,000
Contract 3 540,000 960,000

How much income is to be recognized in 2013?

a. P1,302,000 b. P432,000 c. P642,000 d. P270,000

16. TMT Company which began operations on January 2, 2011 appropriately, uses the
installment method of accounting. The following data pertain to 2011 operations:

Installment sales P900,000

Regular sales 375,000
Cost of regular sales 215,000
Cost of installment sales 630,000
Fair value of repossessed merchandise 54,000
Operating expenses 172,000
Collections (including interest of P24,000) 312,000
Installment accounts written-off due to defaults 44,000
Repossessed accounts 100,000
Reconditioning cost 4,000

What is the net income for the year ended December 31, 2011?
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a. P151,600 b. P127,600 c. P78,400 d. P65,600

Next two questions are based on the following:

On July 10, 2011, Toyota Motors Inc. sold a new car to Mr. Sy for P850,000. The car costs
Toyota P650,625. Mr. Sy paid 25% cash down payment and traded his old car. Toyota granted
an allowance of P80,000 on the old car traded, the balance payable in equal monthly
installment payments. The monthly installment amounts to P30,000 inclusive of 12%
interest on the unpaid balance of the principal amount of obligation. The old car traded
in has a selling price of P120,000 after expending reconditioning cost of P22,500.

After paying three installment, Mr. Sy suffered major financial setback incapacitating
him to continue paying. The car was subsequently repossessed. When reacquired, the car
was appraised to have a fair value of 300,000.

17. What is the gain (loss) on repossession?

a. (P62,617.50) b. P62,617.50 c. (P62,716.50) d. P62,716.50

18. Under the installment method, how much is the realized gross profit to be recognized
at the end of the year?
a. P96,003 b. P75,625 c. P100,000 d. P90,073

19. The following information are obtained from the books of accounts of Robin Inc., on
June 31, 2011:

Deferred gross profit balance (after adjustment) P202,000

Total collections on installment sales 440,000
Gross profit rate based on cost 25%

Robin Inc. uses the installment method of accounting. What is Robin’s total
installment sales for 2011?
a. P1,560,000 b. P1,440,000 c. P1,450,000 d. P1,010,000

20. On December 31, 2010, Jacinto Steel Inc. sold construction equipment to Anthony
Company for P3,600,000. The equipment had cost P2,400,000. Anthony Company paid
P600,000 cash on December 31, 2010 and signed a P3,000,000 note bearing interest at
10 percent payable in five annual installments of P600,000. Jacinto Steel Inc.
appropriately accounted for the sale under the installment method. On December 31,
2011, Anthony Company paid P900,000 including interest of P300,000. For the year
ended December 31, 2011, what total amount of revenue should Jacinto Steel Inc.
recognized from the construction equipment sale and financing?
a. P300,000 b. P200,000 c. P500,000 d. P240,000

FRANCHISE
On January 2, 2011, Mr. A Cion entered into a franchise agreement with Jolibi, Inc. to
sell Jolibi products. The agreement provides of an initial franchise fee of P20,000,000,
payable as follows: P12,000,000 cash to be paid upon signing of the contract, and the
balance in four equal annual payments every December 31. Mr. A Cion signs 10% interest-
bearing note for the balance. The agreement further provides that the franchisor will
assist the franchisee in locating the business site, designing and supervision in the
construction of the building, and training of management and employees. The agreement
also provides that the franchisee must pay a continuing franchisee fees equal to 5% of
its monthly gross sales.

On July 31, 2011, the franchisor completed the initial services required in the contract
at a costs of P2,000,000. The franchisee commenced business operations on November 2,
2011. The gross sales reported by the franchisee to the franchisor are: November sales,
P580,000; and December sales P720,000.

Required: Prepare all entries for 2011 in the books of the franchisor under the following
assumptions:

a. The collection of the note is reasonably assured.

b. The collection of the note is not reasonably assured.

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