CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

ADVANCED FINANCIAL ACCOUNTING GERMAN/LIM/VALIX/K. DELA CRUZ/MARASIGAN

LONG TERM CONSTRUCTION CONTRACTS

Part I: Theory of Accounts

1. Which of the following statements is TRUE regarding long-term construction contracts?

A. Upon completion of the project the total billings must equal the contract price likewise all
billings must be collected by the end of the project.
B. Contract retention decreases the amount of collection and the amount to be credited to the
Progress Billings account.
C. Mobilization fee is usually made upon contract signing, upon receiving a certain amount, the
contractor will credit a revenue account.
D. A project resulted in a profit in year one and anticipated loss in year two, the amount of loss
recognized in year two using the percentage of completion method is higher than the loss
recognized using zero profit method.

2. Which of the following statements is FALSE regarding long-term construction contracts?

A. Any anticipated loss resulting from the contract must be recognized immediately and in full.
B. If upon completion of the project the balance of Progress Billings is greater than the balance of
Construction in Progress, the excess is treated as a liability.
C. General administrative costs may be part of contract costs but would usually be expensed.
D. The latest estimates of anticipated cost of materials, labor and subcontracting costs and
indirect costs required to complete a project should be used to determine the progress toward
completion.

3. Aside from the initial amount of revenue agreed in the long-term construction contract, additional
revenues may be recognized by the contractor to the extent that it is probable that they will result
in revenue and they are capable of being reliably measured. Which of the following will not be
considered as additional contract revenue by a contractor?
A. Variation in contract work as instructed by the customer regarding the scope of work to be
performed.
B. The amount of expected warranty as specified in the contract.
C. Claim that the contractor may seek to collect from the customer for customer caused delays
or errors in specification or design.
D. Incentive payments to be paid to the contractor if specified performance standards are met or
exceeded or for early completion of the contract.

4. Which of the following costs shall be excluded in the contract costs of construction contract?
A. Costs that relate directly to the specific contract.
B. Costs that are directly attributable to contract activity in general and can be allocated to the
contract.
C. Such other costs are specifically chargeable to the customer under the terms of the contract.
D. Selling/marketing costs such as advertisement expense or commission of real estate agents or
brokers.

5. The following costs shall be capitalized as part of construction in progress or contract costs, except
A. Site labor cost and supervision cost and costs of hiring and moving of plant and equipment to
and from the contract site.
B. Systematically, rationally and consistently allocated construction overheads and borrowing
costs.
C. Costs that are specifically chargeable to the customer under the terms of the contract may
include some general administration costs and development costs for which reimbursement is
specified in the terms of the contract.
D. General and research and development costs for which reimbursement is not specified in the
contract.

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Part II: Problem Solving

Problem 1. On January 1, 2022, All Too Weld 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 P3,000,000 P5,000,000 P3,000,000
Estimated cost to complete at year end P7,000,000 P6,000,000 P0
Labor hours consumed 28,000 hours 20,000 hours 32,000 hours
Value of work done P5,200,000 P3,900,000 P3,900,000
Kilometers completed 5km 4km 4km

1. Using the cost-to-cost method, how much is the construction in progress, gross as of the year
ended December 31, 2023?
A. 9,100,000
B. 9,000,000
C. 7,428,571
D. 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?
A. 0
B. 900,000
C. (1,000,000)
D. (1,900,000)

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?
A. 900,000
B. 1,050,000
C. 1,200,000
D. 2.954,545

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?
A. 900,000
B. 1,050,000
C. 1,200,000
D. 2.954,545

Problem 2. Everything Has Crane Inc. incurred the following costs during the first year in one of its
high-rise condominium construction projects:
Cost of materials P11,000,000
Construction labor, inclusive of P1,000,000 supervision P10,000,000
Depreciation of equipment used in the project P2,000,000
Marketing expenses for promoting the sale of the project once completed P2,100,000
Administrative expenses which was reimbursable by the client as per contract P1,400,000
Depreciation of idle equipment not used in any projects P3,000,000
Borrowing costs incurred specifically for this project P500,000
Insurance costs (half of which is for other projects) P1,200,000

Assuming that the total estimated cost to complete the project amounted to P76,500,000, what is
the percentage of completion as of the end of the first year?
A. 33.98%
B. 33.33%
C. 32.03%
D. 31.50%

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Problem 3. On December 31, 2022, Back To Developers Corp. entered into a construction contract to
build a baseball park. The contract had the following provisions:
 The total contract price is P16,000,000.
 A mobilization fee equivalent to 6.25% of the total contract price is due 1 week from contract
signing, deductible at completion of project.
 Half of the contract price will be billed by the end of 2023, 20% of the total contract price by
the end of 2024, and the remaining 30% balance at project completion.
 Retention provision of 10% on all billings.

After the first year of construction, P4,000,000 construction costs were incurred, which was equivalent
to 40% of the total estimated cost to complete the project. After the second year, an additional
P5,000,000 construction costs were incurred, for a total of 75% completion estimate using the cost-to-
cost method.

1. How much was collected from the customer in 2023?

A. 7,200,000
B. 8,000,000
C. 8,100,000
D. 8,200,000

2. How much is the construction in progress, net as of December 31, 2024?

A. 800,000 asset
B. 1,600,000 liability
C. 2,400,000 asset
D. 5,600,000 liability

3. How much is the construction revenue for the year ended December 31, 2024?
A. 5,600,000
B. 6,400,000
C. 12,000,000
D. 16,000,000

Problem 4. I Knew You Were Rubble Inc. entered into a long-term construction contract to construct a
sophisticated flood drainage system to prevent people from drowning, for an initial contract price of
P20,000,000. During 2024, the contract price increased due to the change in the project design. The
following data were available:

2022 2023 2024

Cumulative costs incurred to yearend P2,000,000 ? P21,600,000
RGP for the year ? P700,000 (P3,200,000)
Percentage of completion as of yearend 12.5% 60% 90%

1. How much is the cost of construction to be recognized in the company’s income statement for
the year ended December 31, 2024?
A. 4,800,000
B. 10,800,000
C. 11,000,000
D. 12,000,000

2. How much is the construction revenue to be recognized in the company’s income statement for
the year ended December 31, 2024?
A. 8,800,000
B. 7,800,000
C. 6,600,000
D. 6,000,000

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Problem 5. On January 1, 2022, Losing Him Was Blueprint Company entered into a contract with
Maserati LLC to construct a production facility down a dead-end street. The base price specified in the
contract is P15,000,000, but subject to the following clauses:
 The target completion date is December 31, 2024.
 The price will be reduced by P100,000 for every day that the completion is delayed, up to a
limit of P1,000,000.
 The price will be increased by P50,000 for every day that the project is completed ahead of the
target date, up to a cap of P500,000.
 A bonus of P1,500,000 will be added to the contract price if the facility is awarded the Swift
Environmental Sustainability Award.

In 2022, the constructors estimate that there is a 20% chance of the project being completed 5 days
ahead of the plan, 30% chance that the project will be completed on the target date, and 50% chance
that the project will be completed 15 days in delay. Also, there is a remote chance of achieving the
Swift Environmental Sustainability Award at project completion.

In 2023, the constructors estimate that there is a 40% chance of the project being completed 12 days
ahead of the plan, and a 50% chance that the project will be completed on the target date, and a 10%
chance that the project will be completed 5 days in delay. Also, due to a revolutionary breakthrough in
its construction process, the chance of achieving the Swift Environmental Sustainability Award at
project completion is now reasonably assured.

Due to the multiple possibilities for the actual completion date, the management of the construction
company has determined that the “expected value approach” will be best to predict the variable
consideration concerned. On the other hand, since there are only two possibilities regarding the Swift
Environmental Sustainability Award, the management has decided that the “most likely amount” will
best predict the variable consideration concerned.

The following relevant information were available for the first two years of construction:

December 31, 2022 December 31, 2023

Actual costs incurred for the year P5,460,000 P5,560,000
Estimated costs to complete P7,540,000 P3,480,000

Under IFRS 15, how much is the realized gross profit for the year ended December 31, 2023?
A. 983,000
B. (613,000)
C. (157,000)
D. 101,000

END

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