CONSTRUCTION CONTRACTS

1. Reese Construction Corporation contracted to construct a building for P1,500,000.

Construction began in 2010 and was completed in 2011. Data relating to the contract are
summarized below:
Year ended
December 31,
2010 2011
Costs incurred P600,000 P450,000
Estimated costs to complete 400,000
Reese uses the percentage-of-completion method as the basis for income recognition. For
the years ended December 31, 2010, and 2011, respectively, Reese should report gross
profit of
a. P270,000 and P180,000.
b. P900,000 and P600,000.
c. P300,000 and P150,000.
d. P0 and P450,000.

2. Under a construction contract, a contractor agrees to a fixed contract price of P2,000 to

refurbish the kitchen of a residential flat. The contractors initial estimate of contract costs
on February 2013, the date the contract is agreed is P1,200.

The contractor has a June 30 year-end. The contract price will be paid to the contractor on
the completion of the refurbishment.

As of June 30, 2013 contract cost incurred for work performed to date are P800 and the
contractor estimates the costs to complete the contract will be P400.

The refurbishment was completed on July 31, 2013 at a cost of P1,250.

The contractor determines the stage of completion of the contract by calculating the
proportion that contract costs incurred for work performed to date bear to the latest
estimated total contract costs.

The contract revenue and the contract costs for 2013 amounted to:

a. P2,000; P1,250 c. P533; P800

b. P1,333; P800 d. P0; P0

3. Soriano Construction entered into a fixed price contract with Quintos Co. on July 1, 2011
to construct a medium rise condominium. At that time Soriano estimated that it would
take between two to three years to complete the project. The total contract price for
constructing the building is P4,500,000. Soriano accounts this contract under the
percentage of completion method. The building was deemed completed on December 31,
2012. Estimated percentage of completion , accumulated contract costs incurred,
estimated costs to complete the contract and accumulated billings under the contract are
as follows:

At 12/31/11 At 12/31/12 At 12/31/13

Percentage of completion 30% 60% 100%
Contract costs incurred P1,140,000 P2,820,000 P4,800,000
Estimated costs to complete 2,660,000 1,880,000 0
Progress billings 1,600,000 2,700,000 4,500,000

The amount of gross profit to appear on the income statement for the period ended 2013 is:

a. (P100,000) b. (P2,920,000) c. (P441,000) d. (P330,000)

4. Babaran Corp. recognizes construction revenue and cost using the percentage of
completion method. During 2011, a single long term project began which continue
through 2011. Information on the project follows:

2011 2012
Collections 200,000 600,000
Construction in progress, net of billings 44,000 112,000
Contract billings 200,000 840,000
Current year gross profit 34,000 100,000
 How much is the costs incurred each year?

a. 125,000; 796,000 c. 210,000; 684,000

b. 125,000; 356,000 d. 210,000; 384,000

5. The following information pertain to the building contract of Carbonel Construction

Company, wherein the fixed contract price is P80 million.
2009 2010 2011
Estimated costs P20.1 million P30.15 P16.75 million
million
Progress billings 10 million 25 million 45 million
Cash collection 8 million 23 million 49 million

Assume that all costs are incurred, all billings to customers are made, and all collections
from customers are received within 30 days of billing, as planned. Under the percentage of
completion method of revenue recognition, how much is the income from the construction
for the year 2011?
a. P5,850,000 b. P3,900,000 c. P3,250,000 d. P9,750,000

6. Manabal Construction Company commenced doing business on January 1, 2010.

Construction activities for the first year of operations are shown below. All contract costs
are with different customers, and any work remaining at December 31, 2010, is expected
to be completed in 2011.
Project Total Billings Cash Contract costs Estimated
contract through collection incurred addl costs
price 12/31/10 through through to complete
12/31/10 12/31/10
A P3,000,000 P2,000,000 P1,800,000 P2,480,000 P670,000
B 3,500,000 1,100,000 1,050,000 678,000 2,712,000
C 2,800,000 2,800,000 2,550,000 1,860,000 -0-
D 2,000,000 350,000 250,000 1,230,000 870,000
E 2,400,000 2,050,000 2,000,000 1,850,000 150,000
P13,700,000 P8,300,000 P7,650,000 P8,098,000 P4,402,000

How much must be shown as current asset(costs of uncompleted contract in excess of

billings) in the balance sheet of Manabal Construction Company as of December 31, 2010?
a. P400,000 b. P880,000 c. P1,280,000 d. P0

7. Flores Inc., began work on a P70 million contract in 2011 to construct an office building.
During 2011, Flores uses the percentage of completion method. At 12/31/2011, the
balance ion certain accounts were: construction in progress, P24.5 million; accounts
receivable P2.4 million; and billings on construction in progress, P12 million. At
12/31/2011, the estimated future costs to complete the project total P31.85 million.

What is the entry to record the income from construction recognized in year 2011.
a. Construction in progress P7,350,000
Construction costs 24,500,000
Construction revenue P31,850,000

b. Construction in progress P24,500,000

Construction costs P7,350,000
Construction revenue 17,150,000

c. Construction in progress P31,850,000

Construction costs P24,500,000
Construction revenue 7,350,000

d. Construction in progress P7,350,000

Construction costs 17,150,000
Construction revenue P24,500,000

8. In 2010, Quintero Construction Company was contracted to do private road network of

Dumlao Corporation for P100 million. The project was estimated to be completed in two
years.
The contract provided among other things the following:
a. 5% mobilization fee(to be deducted from the last billing) payable within 15 days
after the signing of the contract;
 b. Retention provision of 10% on all billings;
c. Progress billings of construction are payable within seven days from date of
acceptance.
Quintero estimated its gross margin on the project at 25% and used the percentage of
completion method of accounting. By the end of the year, Quintero presented progress
billings corresponding to 50% completion. Dumlao Corp. accepted all bills presented
except the last one for 10% which was accepted on January 10. With the exception of the
last billing of 8% accepted in 2010, which was due on January 3, 2012, all accepted
billings were settled in 2010.
The gross profit recognized by Quintero Construction Company for 2010 is:
a. Not determinable c. P25 million
b. P12.5 million d. P50 million

9. Cabasal Company entered in a contract to build a small bridge for Tuguegarao City. The
contract price for the bridge was P7,500,000 and Cabasal estimated a total costs of
P6,900,000 in 2010. The company incurred P2,300,000 of costs during 2010. By the end
of 2011, it was apparent that Cabasal had underestimated the real costs. The estimated
total costs of the project skyrocketed to P7,800,000. Construction costs incurred in 2011
totaled P4,000,000. The project was completed in 2012 at a final costs of P7,800,000. No
progress billings were made under the contract and no cash was collected by the end of
2012.
The amount of gross profit (loss) that must be recognized in 2011 must be:
a. P500,000 loss c. P100,000 loss
b. P200,000 profit d. P300,000 loss

10. Holgado Constructions has consistently used the percentage of completion method. On
January 10, 2010, Holgado began work on P3,000,000 construction contract. At the
inception date, the estimated costs of construction was P2,250,000. The following data
relate to the progress of the contract:
Income recognized at December 31, 2010 P 300,000
Costs incurred January 10, 2010 through Dec. 31, 2011 1,800,000
Estimated cost to complete, December 31, 2011 600,000

In its income statement for the year ended Dec. 31, 2011, what amount of gross profit
should Holgado report?
a. P262,500 b. P150,000 c. P450,000 d. P300,000

11. Alla Constrution, Inc. has consistently used the percentage of completion method of
recognizing income. During 2012, Alla started to work on a P3 million fixed price
construction contract. The accounting records disclosed the following data for the year
ended December 31, 2012:
Cost incurred P930,000
Estimated cost to complete 2,170,000
Progress billings 1,100,000
Collections 700,000
How much loss should Alla have recognized in 2012?
a. P0 b. P30,000 c. P100,000 d. P230,000

12. Luchavez Corporation was tapped to build two private power plants in Ilagan and Solana.
The following information relates to these projects, which were started in 2011:
Ilagan Solana
Contract price P10,500,000 P7,500,000
Costs incurred to date 6,000,000 7,000,000
Estimated costs to complete 3,000,000 1,000,000
Billings during the year 3,750,000 6,750,000
Collections during the year 2,250,000 6,250,000

What is the gross profit (loss) for 2011 if the percentage of completion method is used?
a. P500,000 b. P562,500 c. P1,000,000 d. (P500,000)

13. The following data pertained to Damasco Companys construction jobs, which commenced
during 2011.
Project 1 Project 2
Contract price P420,000 P300,000
Costs incurred during 2011 240,000 280,000
Estimated costs to complete 120,000 40,000
Billed to customers during 2011 150,000 270,000
 Received from customers during 2011 90,000 250,000

If Damasco Company used the percentage of completion method, what amount of gross
profit (loss) would it report in 2011?
a. P40,000 b. P22,500 c. P20,000 d. (P20,000)

14. Abalos Company entered into a construction agreement in 2011 for the rip-rapping of Pier
4. The original contract price was P9,6000,000 but a change order was issued in 2012
increasing the contract price by P480,000. Abalos uses the percentage of completion
method of revenue recognition on long term construction contracts. The following
information are obtained on the project of 2011 and 2012.
2011 2012
Costs incurred to date P4,920,000 P8,640,000
Estimated costs to complete 4,920,000 2,160,000
Billings made 5,280,000 8,520,000
Cash collections 4,380,000 7,500,000

What is the gross profit(loss) of Abalos on the project for 2012?

a. (P840,000) b. (P480,000) c. (P1,080,000) d. (P960,000)

15. Designer Homes Construction Company uses the percentage-of-completion method. The
costs incurred to date as a proportion of the estimated total costs to be incurred on a
project are used as a measure of the extent of progress made toward completion of the
project. During 2006, the company entered into a fixed-price contract to construct a
mansion for Donald Thrumper for P24,000,000. The following details pertain to that
contract:

12/31 12/31
2010 2011
Percentage of completion 25% 60%
Estimated total costs of contract 18,000,000 20,000,000
Gross profit recognized to date 1,500,000 2,400,000

The amount of construction costs incurred during 2007 was:

a. P2,000,000. c. P7,500,000.
b. P4,500,000. d. P12,000,000.

16. Bella Construction Co. uses the percentage-of-completion method. In 2006, Bella began
work on a contract for P2,200,000; it was completed in 2007. The following cost data
pertain to this contract:
Year Ended December 31
2006 2007
Costs incurred during the year P780,000 P560,000
Estimated costs to complete at end of year 520,000

The amount of gross profit to be recognized on the income statement for the year ended
December 31, 2006 is:
a. P0. b. P516,000. c. P540,000. d. P900,000.

17. Refer to the facts for Question above. The amount of gross profit to be recognized on the
income statement for the year ended December 31, 2007 is:
a. P860,000. b. P360,000. c. P344,000. d. P320,000.

18. In selecting an accounting method for a newly contracted long-term construction project,
the principal factor to be considered should be
a. the terms of payment in the contract.
b. the degree to which a reliable estimate of the costs to complete and extent of
progress toward completion is practicable.
c. the method commonly used by the contractor to account for other long-term
construction contracts.
d. the inherent nature of the contractor's technical facilities used in construction.

19. The percentage-of-completion method must be used when certain conditions exist. Which
of the following is not one of those necessary conditions?
a. Estimates of progress toward completion, revenues, and costs are reasonably
dependable.
b. The contractor can be expected to perform the contractual obligation.
 c. The buyer can be expected to satisfy some of the obligations under the contract.
d. The contract clearly specifies the enforceable rights of the parties, the
consideration to be exchanged, and the manner and terms of settlement.

20. When work to be done and costs to be incurred on a long-term contract can be estimated
dependably, which of the following methods of revenue recognition is preferable?
a. Installment-sales method
b. Percentage-of-completion method
c. Completed-contract method
d. None of these

21. How should the balances of progress billings and construction in process be shown at
reporting dates prior to the completion of a long-term contract?
a. Progress billings as deferred income, construction in progress as a deferred
expense.
b. Progress billings as income, construction in process as inventory.
c. Net, as a current asset if debit balance, and current liability if credit balance.
d. Net, as a current asset if credit balance, and current liability if debit balance.

22. In accounting for a long-term construction-type contract using the

percentage-of-completion method, the gross profit recognized during the first year would
be the estimated total gross profit from the contract, multiplied by the percentage of the
costs incurred during the year to the
a. total costs incurred to date.
b. total estimated cost.
c. unbilled portion of the contract price.
d. total contract price.

23. The principal disadvantage of using the percentage-of-completion method of recognizing

revenue from long-term contracts is that it
a. is unacceptable for income tax purposes.
b. gives results based upon estimates which may be subject to considerable
uncertainty.
c. is likely to assign a small amount of revenue to a period during which much
revenue was actually earned.
d. none of these.

24. One of the more popular input measures used to determine the progress toward
completion in the percentage-of-completion method is
a. revenue-percentage basis.
b. cost-percentage basis.
c. progress completion basis.
d. cost-to-cost basis.

25. Cost estimates on a long-term contract may indicate that a loss will result on completion of
the entire contract. In this case, the entire expected loss should be
a. recognized in the current period, regardless of whether the
percentage-of-completion or completed-contract method is employed.
b. recognized in the current period under the percentage-of-completion method, but
the completed-contract method should defer recognition of the loss to the time
when the contract is completed.
c. recognized in the current period under the completed-contract method, but the
percentage-of-completion method should defer the loss until the contract is
completed.
d. deferred and recognized when the contract is completed, regardless of whether the
percentage-of-completion or completed-contract method is employed.

END
26. Benson Construction specializes in the construction of commercial and industrial
buildings. The contractor is experienced in bidding long-term construction projects of this
type, with the typical project lasting fifteen to twenty-four months. The contractor uses the
percentage-of-completion method of revenue recognition since, given the characteristics of
the contractor's business and contracts, it is the most appropriate method. Progress
toward completion is measured on a cost to cost basis. Benson began work on a lump-sum
contract at the beginning of 2011. As bid, the statistics were as follows:
Lump-sum price (contract price) P4,000,000
Estimated costs
Labor P 850,000
Materials and subcontractor 1,750,000
Indirect costs 400,000 3,000,000 P1,000,

At the end of the first year, the following was the status of the contract:
Billings to date P2,230,000
Costs incurred to date
Labor P 464,000
Materials and subcontractor 1,098,000
Indirect costs 193,000 1,755,000
Latest forecast total cost 3,000,000

It should be noted that included in the above costs incurred to date were standard
electrical and mechanical materials stored on the job site, but not yet installed, costing
P105,000. These costs should not be considered in the costs incurred to date.

Compute the percentage of completion on the contract at the end of 2011 and the amount
of gross profit that would be reported on this contract at the end of 2011.
a. 58.5%; P1,755,000
b. 55%; P550,000
c. 58.5%; P585,000
d. 55%; P1,650,000

ANS: B
Costs to date P1,755,000
Less materials on job site (105,000)
P1,650,000

Costs Incurred to Date

= Percentage of Completion
Total Estimated Costs

P1,650,000
= 55%
P3,000,000

(b) 55% P4,000,000 = P2,200,000

Costs incurred 1,650,000
Gross profit P 550,000

(c) Construction Expense............................................................... 1,650,000

Construction in Process ............................................................ 550,000
Revenue from Long-Term Project.................................... 2,200,000

(d) Current Assets

Accounts receivable P250,000 (P2,230,000
P1,980,000)

PTS: 1

PROBLEM

1. On January 5, 2013, APS Builders, Inc. entered into a contract with Andrews Corporation
for the construction of the latters corporate building. The total contract is P2,000,000
from which APS expects to earn gross profit of P200,000.

The building was completed and turned over in December 2015. Data about the project are
as follows.
 2013 2014 2015
Cost incurred P 540,000 P 900,000 P 160,000
Estimated cost to complete 1,260,000 160,000 -
Progress billings 160,000 800,000 1,040,000
Collections 110,000 840,000 1,050,000

Required:

1. Compute the gross profit to be realized per year for 2013, 2014, and 2015 using
the:

a. Percentage of completion method

b. Zero-profit margin approach(hybrid method)

2. Prepare all the necessary journal entries to record the data/transactions under
both methods.

ANS:
solve

PTS: 3 REF: undergrad HO MSC: LCC-P0

2. Following are the data pertaining to long-term construction contract.

Required:

1. Compute the gross profit(loss) to be recognized per year.

Year 1 Year 2 Year 3

Contract price-P2,000,000
Costs incurred P540,000 P900,000 P504,000
Estimated cost to complete 1,260,000 504,000 -

2. Compute the gross income to be realized per year based on the following data:

Year 1 Year 2 Year 3

Contract price-P1,875,000
Costs incurred P506,250 P843,750 P562,500
Estimated cost to complete 1,181,250 562,500 -

ANS:
solve

PTS: 3 REF: undergrad HO MSC: LCC-P0

3. Son Construction receives a contract to build a building over a period of 3 years for a price
of P7,000,000. Information relating to the performance of the contract is summarized as
follows:

2010 2011 2012

Construction costs incurred during the P1,500,000 P2,420,000 P1,680,000
year
Estimated costs to complete 3,500,000 1,680,000 -
Billings during the year 1,200,000 2,600,000 3,200,000
Collections during the year 1,000,000 2,700,000 3,300,000
Required: Prepare the entries under the percentage of completion.

ANS:
??

PTS: 3 REF: crc-ace 2011

4. Cabanilla Company signed a contract to build a dam over a period of three years for a price
of P20,000,000. Information relating to the performance of the contract is summarized as
follows:

2010 2011 2012

 Construction costs incurred during the P4,000,000 P8,000,000 P12,000,000
year
Estimated costs to complete 12,000,000 12,000,000 -
Billings during the year 3,000,000 7,000,000 10,000,000
Collections during the year 2,600,000 7,200,000 10,200,000

Required: Prepare the entries under the percentage of completion.

ANS:
??

PTS: 3 REF: CRC-ACE 2011 MSC: LCC-P

5. Elisa Tower Construction Inc., enters into a contract on January 1, 2011 to construct a
17-storey building for P400,000,000. During the construction period, many changes
orders are made to the original contract. The following schedule summarizes these
changes made in 2011.

Cost Estimated Contract price

incurred cost to
2011 complete

Basic contract P80,000,000 P280,000,000 P400,000,000

Change order #1 500,000 500,000 1,250,000

Change order #2 - 500,000 0

Change order #3 1,000,000 1,000,000 Still to be negotiated at

least cost

Change order #4 1,250,000 0 1,000,000

Required: Compute the percentage of completion and the gross profit on construction to be
recognized during the year under the cost to cost percentage of completion method.

ANS:
??

PTS: 3 REF: CRC-ACE 2011, P. Guerrero txtbook

MSC: LCC-P