LTCC

Long-term
Construction
Contracts
Methods
1. Percentage of Completion (POC) Method - with reliable estimates
a. Input measures - cost incurred, labor hours, machine hours
b. Output measures - estimates, surveys of engineers and architects
2. Zero Profit Method (ZPM) - without reliable estimates

- also called cost-recovery method (CRM)
Formulas
Costs incurred, to date
Percentage of Completion =
Total estimated costs to complete
● Costs incurred to date - total costs incurred from

the start of the contract until the current
reporting date
● Total estimated costs to complete - sum of total
costs incurred to date and estimated costs to
complete
Formulas
Contract Price xxx,xxx
Total Estimated Cost to Complete (xxx,xxx)
Estimated Gross Profit xxx,xxx
Percentage of Completion xx%
Realized Gross Profit, To Date xxx,xxx
Realized Gross Profit, Previous Year (xxx,xxx)
Realized Gross Profit, Current Year xxx,xxx
Formulas
Contract Price xxx,xxx
Percentage of Completion xx%
Revenue, To Date xxx,xxx
Revenue, Previous Year (xxx,xxx)
Revenue, Current Year xxx,xxx
Cost of Construction (xxx,xxx)
Realized Gross Profit, Current Year xxx,xxx
Formulas
Costs Incurred, To Date xxx,xxx
Realized Gross Profit, To Date xxx,xxx
Construction in Progress, Gross xxx,xxx
Progress Billings, To Date (xxx,xxx)
Construction in Progress, net xxx,xxx
On January 1, 2022, Company X was contracted to
build an office building for Company Y for a total
contract price of P11,800,000. Estimated total
contract costs are P10,400,000. Costs incurred to date
related to the project are as follows:
● Cost of direct materials used 800,000

● Cost of direct labor, including
supervision of P200,000 600,000
● Cost of indirect materials used 220,000
Problem 1
● Cost incurred in obtaining the
contract previously written off 280,000
● Depreciation of equipment used
on the project 480,000
● Payroll of design and technical
department allocated in the
contract 320,000
● Insurance cost
(⅓ for the project) 720,000
● Costs of contracted research
and development 420,000
● Depreciation of idle equipment
not used on a particular contract 240,000
● Selling costs 180,000
● General and administrative expenses
specifically included under the term
of the contract (chargeable to
Problem 1
customer) 120,000
● Borrowing cost incurred during the
construction period 520,000
● Advances made to subcontractors 400,000
Using the cost-to-cost method, what is the realized

gross profit to be recognized in 2022?
Answer: 500,780
Problem 2
On January 1, 2021, Company X entered into a contract to construct a building for a customer.
Company X identified its performance obligation to be satisfied over time. The company uses
the input method based on costs to measure its progress on the contract. The contract price is
P9,000,000. Information on the construction is provided below:
2021 2022 2023

Contract costs incurred per year 2,760,000 3,540,000 500,000
Billings per year 50% 30% 20%
Collections on billings per year 90% 90% balance
Estimated costs to complete 4,140,000 700,000 -
Compute for the revenue, cost of construction, and gross profits in 2021, 2022, and 2023
under:
a. Percentage of completion method
b. Zero-profit method
Problem 2
POC 2021 2022 2023
Revenue 3,600,000 4,500,000 900,000
ANSWERS: Cost of
2,760,000 3,540,000 500,000
Construction
Gross Profit 840,000 960,000 400,000
ZPM 2021 2022 2023
Revenue 2,760,000 3,540,000 2,700,000
Cost of
2,760,000 3,540,000 500,000
Construction
Gross Profit 0 0 2,200,000

Problem 3
On January 1, 2022, ABC Constructions entered into a long-term construction
contract to build a road upstate to prevent travelers from getting lost. The P13 million
project, which spans 22 kilometers, was completed in three years and all relevant
information about the projects are as follows:
For the year 2022 2023 2024

Cost incurred 3,000,000 5,000,000 3,000,000
Estimated cost to complete at year end 7,000,000 6,000,000 –
Labor hours consumed 28,000 hrs. 20,000 hrs. 32,000 hrs.
Value of work done 5,200,000 3,900,000 3,900,000
Kilometers completed 5km 4km 4km
Problem 3
1. Using the cost-to-cost method, how much is the construction in progress, gross
as of the year ended December 31, 2023? Answer: 7,000,000
2. Assuming that the company used the zero-profit method, how much is the
realized gross profit for the year ended December 31, 2023? Answer: (1,000,000)
3. Assume a budget of 80,000 hours to complete the project, how much is the
realized gross profit for the year ended December 31, 2022 if the input method
based on labor hours was used? Answer: 1,050,000
4. Assuming the company used the output method based on value of the work
certified by an expert, how much is the realized gross profit for the year ended
December 31, 2022? Answer: 1,200,000
Problem 4
On April 1, 2022, Company X obtained a contract to construct a building. The building was
estimated to be built at a total cost of P17,500,000, but that amount will be reduced depending on
when construction of building is completed and is scheduled for completion on October 2024.
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.
On December 31, 2022 and 2023, Company X cannot predict the variable consideration regarding
the completion of the project on time because of the different outcomes possible based on the
company’s construction schedule and its experiences with past projects.
On year 2024, due to bad weather conditions, the company does not expect that it can finish the
building on time. The completion of the project was delayed for 5 weeks. Below are the following
data pertaining to the construction periods.
Problem 4
2022 2023 2024
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
1. Using the percentage of completion method, what is the realized gross profit (loss) in 2023?
Answer: 8,260,000
2. Using the percentage of completion method, what is the realized gross profit (loss) in 2024?
Answer: 840,000
Problem 5
On January 1, 2021, a contractor enters into a construction
contract which includes a fixed contract price of P144,000,000
to build a bridge. The contract has a December 31 year-end.
On December 31, 2021, the contractor’s estimate of the total

contract cost is still P96,000,000. However, by the end of 2022,
the contractor’s estimate of contract cost increased to
P120,000,000, excluding the variation below. In 2022, the
customer and the contractor agreed to a variation resulting in
an increase in contract revenue of P2,400,000 and estimated
additional contract costs of P1,800,000.
Problem 5
Actual cumulative costs incurred to the end of 2021, 2022 and
2023 (the end of the contract) including the costs of the
variation are P36,000,000, P85,260,000 and P120,600,000,
respectively.
The contractor determines the stage of completion of the

contract costs incurred for a work performed to date bear to
the latest estimated total contract costs.
Determine the profit (loss) for each year.

2021: 18,000,000
2022: (780,000)
2023: 8,580,000

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Long-term

2. Zero Proﬁt Method (ZPM) - without reliable estimates

● Costs incurred to date - total costs incurred from

● Cost of direct materials used 800,000

Using the cost-to-cost method, what is the realized

2021 2022 2023

Revenue 3,600,000 4,500,000 900,000

Gross Proﬁt 840,000 960,000 400,000

ZPM 2021 2022 2023

Revenue 2,760,000 3,540,000 2,700,000

Gross Proﬁt 0 0 2,200,000

For the year 2022 2023 2024

On December 31, 2021, the contractor’s estimate of the total

The contractor determines the stage of completion of the

Determine the proﬁt (loss) for each year.

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