Chart Title

CHAPTER 8- Revenue Recognition: Construction Contracts

Multiple Choice

A 1. DJD Construction is constructing a building for Hotel Dian. Under the construction agreement it for any reaso
DJD can't complete construction. Hotel Dian would own the partially completed building and could hire anot
construction company to complete the job. When should DJD recognize revenue: as the building is construct
or after construction is completed?
a. Over time c. No revenue recognition
b. Point in time d. No performance obligation

C 2. On January 1, 20x6, Silver Construction Company signed a contract to build a custom garage for a customer a
recived P 10,00 in advance for the job. The new garage will be built on the customer's land. To complete this
project, Silver must first build a concrete floor, construction wooden pillars and walls, and finally install a pro
Silver normally charges stan-alone prices of P3,000, P4,000, and P5,000, respectively,for eahc of these three
smaller tasks if done separately. How may performance obligations exist in this contract?
a. 0 c. 2
b. 1 d. 3

C 3. DJ Builders Construction builds luxury houses in remote areas. On June 1,20x6, the company signed a contrac
build a house in an undeveloped section of a mountainside, and received P2million in advance for the job. To
complete the project, the company must construcct a pathway leading to the building lot, clear a large hillsid
and construct a wooden house. Normally, the company would change P 400,000, P 1,400,000, and P 500,000
respectively, for each of these tasks if done separately. Given the information above, how many performance
obligations are included in this contract?
a. 0 c. 2
b. 1 d. 3

C 4.   Mediocre Inc. has entered into a very profitable fixed price contract for constructing a high-rise building ove
period of three years. It incurs the following costs relating to the contract during the first year:
·         Cost of material = 2.5 million
·         Site labor cost = 2.0 million
·         Agreed administrative costs as per contract to be reimbursed by the customer = 1milliion
·         Depreciation of the plant used for the construction = 0.5million
·         Marketing costs for selling apartments, when they are ready = 1.0 million

Total estimated cost of the project = 18 million

the percentage of completion of this contract of the year-end is:
a. 33 1/3% (=6.0/ 18.0) c. 25% (=4.5/18.0)
b. 27% (=4.5/16.5) d. 39% (7.0/18)

B 5. Manroe Construction Company uses the percentage-of-completion (over time) method of

accounting. In 20x4, Monroe began work on a contract it had received which provided for a
contract price of P 15,000,000. Other details follow:
 Costs incurred during the year
Estimated costs to complete as of December 31
Billings during the year
Collections during the year

What should be the gross profit recognized in 20x4?

a. P 600,000 c. P 3,000,000
b. P 1,800,000 d. P 7,000,000

C 6. Adler Construction Co. uses the percentage-of-completion (over time) method. In 20x4, Adler
began work on a contract for P 3,300,000 and it was completed in 20x5. Data on the costs are:

Costs incurred
Estimated costs to complete
For the years 20x4 and 20x5, Adler should recognize gross profit of
20x4 20x5 20X4
a. P -0- P 1,290,000 c. P 810,000
b. P 774,000 P 516,000 d. P 810,000

D 7. AJD Company recognizes construction revenue and express using the percentage of completion
(over time) method. During 20x4, a single long-term project was begun which continued through 2005.
Information on the project were as follows:

20x4
Accounts Receivable from
construction contract P 200,000
Construction expenses 210,000
Construction in progress 244,000
Portial billings on contract 200,000
The profit recognize from the long-term construction contract should amount to:
20x4 20x5 20X4
a. P 44,000 P456,000 c. 34,000
b. 44,000 200,000 d. 34,000

Use the following information for questions 8 and 9:

Gomez, Inc. began work in 20x4 on contract #3814, which provided for a contract price of P 7,200,000.
Other details follow:

20x4
Costs incurred during the year P 1,200,000
Estimated costs to complete, 12/31 31 3,600,000
Billings during the year 1,350,000
 Collections during the year 90,000

B 8. Assume that Gomez uses the percentage-of-completion (over time) method of accounting.
The portion of the total fross profit to be recognized as income in 20x4 is
a. P 450,000 c. P 1,800,000
b. P 600,000 d. P 2,400,000

C 9. Assume that Gomez uses the cost recovery method (point in time) of accounting. The portion of the
total gross profit to be recognized as income in 20x5 is
a. P 900,000 c. P 2,325,000
b. P 1,350,000 d. P 7,200,000

A 10. Tyro Construction Company has two projects, for which it reported, as of December 31, 20x5, the
following information:

In thousand pesos: Project A

Contract Price P 4,800
20x4: Costs incurred P 3,400
Percent completed 75%
20x5: Costs incurred P 1,250
Percent Completed 25%
Using the percentage-of-completion (over time) method of revenue recognition, gross profit on
Project A to be recognized in 20x4 would be:
a. P 200,000 c. P 400,000
b. P 300,000 d. P 900,000

Use the following information for questions 11 and 12:

Kiner, Inc. began work in 20x4 on a contract for P8,400,000, Other data are as follows:
20x4
Costs incurred to date P3,600,000
Estimated costs to complete 2,400,000
Billings during the year 2,800,000
Collection to year 2,000,000

A 11. If Kiner uses the percentage-of-completion (over time) method, the gross profit to be recognized in 20x4 is
a. P1,440,000 c. P2 160,000
b. P1,600,000 d. P2,400,000

B 12. It Kiner uses the cost recovery method (point in time), the gross profit to be recognized in 20x5 is:
a. P1,360,000 c. P 1,400,000
b. P2,800,000 d. P5,600,000

Use the following information for questions 13 and 14:

A 13. Horner Construction Co. uses the percentage-of-completion method. In 20x4, homer began work on
 a contract for P5,500,000; it was completed in 20x5. The following cost data pertain to this contract:

Year Ended December 31

20x4
Costs incurred P1,950,000
Estimated cocts to complete at the end of the year 1,300,000

The amount of gross profit to be recognized on the income statement for the year ended December 31, 20x5
a. P 800,000 c. P 900,000
b. P 860,000 d. P 2,150,000

C 14. If the cost recovery method (zero-profit approach) of accounting was used, the amount of gross profit
to be recognized for years 20x4 and 20x5 would be:
20x4 20x5 20x4
a. P 2,250,000 0 c. P 0
b. P 2,150,000 -100,000 d. P 0

D 15. On October 31, 20x4, Mr. Cruz bought properly from D'Vision Heights which had earlier cost the latter P250,0
The company received a dwon payment of P100,000 an a P400,0000 mortgage note payable in twenty equal
semiannual installments plus 16% interest per annum an unpaid principal. Assuming the gross profit is
recognized in the period of sale, the amount of gross profit to be recognized by D'Vision Heights in 20x6 wou

a. P0 c. P 100,000
b. P 50,000 d. P 250,000

C 16. Hayes Construction Corporation contracted to construct a building for P1,506 Construction began in 20x4 an
was completed in 20x5. Data relating to the contract are summarized below:
Year Ended December 31
20x4
Costs incurred P600,000
Estimated cocts to complete 400,000

Hayes uses the percentage of completion method (over time) as the basis for inch recognition. For the
years ended December 31, 20x4, and 20x5, respectively, Haye should report gross profit of
a. P 270,000 and P 180,000 c. P 300,000 and P 150,000
b. P 900,000 and P600,000 d. P 0 and 450,000

A 17. Ube Construction Company has consistently used the percentage-of-completion method (over time).
On January 10, 20x4, Ube began work on a P6,000,000 construction contract. At the inception date, the
estimated cost of construction was P4,500,000. The following data relate to the progress of the
contract:
Income recognized at 12/21/20x4 . . . . . . . . . . . P600,000
Cost incurred 1/10/20x4 through 12/31/20x5 . . . . . 3,600,000
Estimated cost to complete at 12/21/20x5 . . . . . . . 1,200,000
 How much income should Ube recognize for the year ended December 31, 20x5?
a. P 300,000 c. P 600,000
b. P 535,000 d. P 900,000

B 18. Layton Construction Company has consistently used the percentage-of completion method (over
time) of recognizing income. During 20x4, Layton entered into a fixed-price contract to construct an
office building for P10,000,000. Information relating to the contract is as follows:

Dec-31
20x4
Percentage of completion 20%
Estimated total cost at completion P 7,500,000
Income recognized (cumulative) 500,000

Contract costs incurred during 20x5 were:

a. P 3,200,000 c. P 3,500,000
b. P 3,300,000 d. P 4,800,000

B 19. Remington Construction Company uses the percentage-of-completion method (over time). During
20x4, the company entered into a fixed-price contract to construct a building for Sherman Company for
P30,000,000. The following details pertain to the contract:

At December 31, 20x4

Percentage of completion 25%
Estimated total cost of contract P22,500,000
Gross profit recognized to date 1,875,000

The amount of construction costs incurred during 20x5 was

a. P 15,000,000 c. P 5,625,000
b. P 9,375,000 d. P 2,500,000

B 20. The Naples Company uses the percentage-of-completion method and the cost-to-cost method for its long-te
construction contracts. On one such contract, Naples expects total revenues of P260,000. During the first
year, Naples incurred costs pf P50,000 and billed the customer P30,000 under the contract. At what net amo
should Naples Construction in Progress for this contract be reported at the end of the first year?

a. P 30,000 c. `P 50,000
b. P 35,000 d. P 65,000
 ts

greement it for any reason.

lding and could hire another
s the building is constructed,

revenue recognition
performance obligation

m garage for a customer and

r's land. To complete this
ls, and finally install a proof.
y,for eahc of these three
tract?

company signed a contract to

in advance for the job. To
ng lot, clear a large hillside,
1,400,000, and P 500,000,
e, how many performance

ng a high-rise building over a

he first year:

r = 1milliion

% (=4.5/18.0)

#5 Costs incurred during the year

Estimated Costs Complete 12/31
Actual Costs incurred
 20X4 Contract Price
P 7,200,000 Costs Incurred
4,800,000 Gross Profit
6,600,000
3,900,000

Year Ended December 31

20x4 20x5
P 1,170,000 P 840,000
780,000 -

20X5
P 480,000
P 1,290,000

f completion
nued through 2005.
#7 20x4 Construction Expense
Construction in Progress
20x5 Gross Profit

P 600,000 20x5 Construction in Progress (20x4)

384,000 Construction Expense
728,000 Construction in Progress (20x5)
840,000 Gross Profit

20X5
256,000
100,000

of P 7,200,000.

#8 Cost-to-cost
20x5
P 3,675,000 Contract Price
0
5,400,000 Actual Cost Incurred to date
 5,850,000
Total Estimated Cost
Estimated Gross Profit
Percentage

Revenue
he portion of the Cost Expense
Gross Profit

#9 Contract Price
Less: Cost Incurred (20x5)
r 31, 20x5, the Gross Profit to be Recognized

#10
Project B Contract Price
P 860 Percentage of Completion
Recognized Revenue to date
Less: Costs incurred to date
P 140 Gross Profit
15% Less: Gros Profit in Prior Year
oss profit on Gross Profit in Current Year

20x5
P5,600,000

8,400,000
7,200,000

be recognized in 20x4 is #11 3,600,000/ 600,000 x (8,400,000 - 6,000,000)

= 1,440,00 Gross Profit in 20x4

nized in 20x5 is: #12 Contrac Price

Costs Incurred to date 20x5
Gross profit recognized

er began work on
n to this contract:

Year Ended December 31

20x5
P1,400,000
-

ended December 31, 20x5 is:

ount of gross profit

20x5
2,150,000
2,250,000

rlier cost the latter P250,000.

e payable in twenty equal
g the gross profit is
Vision Heights in 20x6 would be:

truction began in 20x4 and

Year Ended December 31

20x5
P450,000
-

ecognition. For the

00,000 and P 150,000

and 450,000

ethod (over time). #17 Contract Price

e inception date, the Less: Total Estimated Costs
ogress of the Costs Incurred
Estimated Costs to
complete
Less: Cost incurred to date
Multiplied by percentage of completion
Gross Profit to date
 Less: Gross Profit in prior year
Gross Profit in current year

method (over
t to construct an #18 20x4: Cost to date- 7,500,000 x 20%
20x5: Cost to date- 8,000,000 x 60%
Costs Incurred during 20x5
Dec-31
20x5
60%
P 8,000,000
1,200,000

er time). During #19 Cost Incurred in 20x5

erman Company for (25,000,000 x 60%) - (22,500,000 x 25%)

At December 31, 20x5

60%
P25,000,000
3,000,000

ost method for its long-term #20

0,000. During the first Cost incurred
ontract. At what net amount Contract Price
e first year? Cost Incurred each year
Add: Costs incurred in prior year
Cost incurred to date
Add: Estimated Cost to complete
Total Estimated Costs
Estimated Gross Profit (loss)
Multiplied by Percentage of completion
Construction in Progress
Less: Progress Billings
Construction in Progress account due from customers
(7,200,000)
(4,800,000)
12,000,000
 (15,000,000 x 60%) 9,000,000
(12,000,000 x 60%) 7,200,000
1,800,000

210,000
n in Progress (244,000)
34,000

n in Progress (20x4) 2,344,000

384,000
n in Progress (20x5) (728000)
100,000

20x4 20x5
7,200,000 7,200,000
1,200,000 3,675,000
Incurred to date 1,200,000 4,875,000
 3,600,000 0
4,800,000 4,875,000
2,400,000 2,325,000
25% 1,005

20x4 20x5
1,800,000 7,200,000 1,800,000 5,400,000
1,200,000 4,875,000 1,200,000 3,675,000
600,000 2,325,000 600,000 1,725,000

7,200,000
ncurred (20x5) 4,875,000
t to be Recognized P 2,325,000

20X4
4,800,000
of Completion 75%
Revenue to date 3,600,000
incurred to date 3,400,000
200,000
Profit in Prior Year 0
t in Current Year 200,000

(8,400,000 - 6,000,000)

8,400,000
(5,600,000)
2,800,000
 P 6,000,000

3,600,000

1,200,000 4,800,000
1,200,000
age of completion 3.6/4.8
900,000
 600,000
300,000

e- 7,500,000 x 20% 1,500,000

e- 8,000,000 x 60% 4,800,000
-3,300,000

9,375,000
22,500,000 x 25%)

50,000
260,000
50,000
0
50,000
150,000
200,000
60,000
age of completion 20/200 15,000
65,000
30,000
ess account due from customers 35,000