IFRS 15 AND LONG TERM CONSTRUCTION CONTRACT

NAME:__________________________________________ YEAR/SECTION:_______

THEORETICAL 1 POINT EACH

1. The following costs will be accounted for as contract costs except:
a. Site labor costs, including site supervision
b. Cost of moving plant, equipment to and from the contract site
c. Depreciation of plant and equipment used on the contract
d. None of the above

2. The following is/are included as the costs of construction contract:

a. Borrowing costs during the construction period
b. Selling costs
c. Depreciation of idle plant and equipment that is not used on a particular
contract
d. All of these shall not be included as part of costs of construction contracts

3. When the outcome of a construction contract can be estimated reliably, contract

revenue and contract costs associated with the construction contract shall be
recognized as revenue and expenses, respectively, by reference to the stage of
completion of the contract activity at the end of the reporting period.

An expected loss on the construction contract shall be recognized as an expense

immediately.
a. True, True
b. True, False
c. False, True
d. False, False

4. When it is probable that total costs will exceed the total contract revenue, the expected
loss shall be recognized immediately under:
a. Percentage of completion method
b. Cost of recovery method
c. Both methods
d. Niether of the above

5. The amount of advances received from customers or clients will be included in the
computation of contract revenue recognized at the end of reporting period.

The amount of advances to third parties, such subcontractors, will be included in the
computation of construction contract costs.
a. True, True
b. True, False
c. False, True
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 d. False, False
6. Retentions are amounts of progress billings that are not paid until the satisfaction of
conditions specified in the contract for the payment of such amounts or until defects
have been rectified.

Mobilization fees are amounts billed for work performed on a contract whether or not
they have been paid by the customer.
a. True, True
b. True, False
c. False, True
d. False, False

7. An entity shall present the gross amount due to customers and due from customers for
contract work as an asset and liability, respectively.

The gross amount due to customers for contract work is the net amount of costs
incurred plus recognized profits; less the sum of recognized losses and progress billings,
in which case the progress billings exceed costs incurred plus recognized profits (less
recognized losses)
a. True, True
b. True, False
c. False, True
d. False, False

8. Which of the following costs should be included in contract costs?

a. Project managers’ costs
b. Destruction of an existing building
c. Restoration of an old factory
d. All of these are included in contract costs

9. Which statement is true when the outcome of construction contract cannot be

estimated reliably?
a. Revenue shall be recognized only to the extent of contract costs incurred that is
probable will be recoverable.
b. Contract costs shall be recognized as an expenses in the period when incurred.
c. An expected loss on the construction contract shall be recognized as an expense
immediately.
d. All of these statements are true.

10. An entity shall disclose all of the following in relation to a construction contract, except
a. The method used to determine the stage of completion
b. The method used to determine the contract revenue recognized in the period
c. Advances received in cash, analyzed according to each material contract
d. Total amount of contract revenue recognized in the period

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 11. The gross amount due from customers presented as an asset is equal to
a. Costs incurred plus recognized profit
b. Costs incurred less recognized profit
c. Costs incurred plus recognized profit less the sum of recognized loss and progress
billings
d. Costs incurred plus the sum of recognized profit and progress billings

12. In selecting an accounting method for a long-term construction contract, 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 progress toward contract completion
is practicable
c. The method commonly used by the contractor to account for long-term construction
contacts
d. The inherent nature of the contractor’s technical facilities used in construction

13. The calculation of the income recognized in the first year of a 4 year construction
contract accounted for using the percentage of completion method is generally based
on the ratio of
a. Total estimated costs to estimated costs to complete
b. Total estimated costs to actual costs incurred to date
c. Actual costs incurred to date to total estimated costs
d. Estimated costs to complete to total estimated costs

14. In accounting for a long-term constriction contract using the percentage of completion
method, the amount of income recognized in any year would be added to
a. Deferred revenue
b. Progress billings on contracts
c. Construction in progress
d. Property, plant and equipment

15. When should an expected loss on a long-term construction contract v=be recognized?
Cost recovery Percentage of completion
a. Immediately Over life of project
b. Immediately Immediately
c. Contract complete Over life of project
d. Contract complete Immediately

16. A contract include a requirements for the customer to purchase a minimum quantity of goods
from the entity each month, but the customer is not committed to always purchasing the
minimum quantity each month and the entity does not enforce the requirement to purchase the
minimum quantity. Is criterion still be satisfied ?

a.) NO b.) YES c. ) Contract is void d. ) unenforceable

17. Which of the following is/are subject to IFRS 15 ?

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 a.) Installment Sale
b.) Donation
c.) Franchise
d.) a & c
18. Under IFRS 15, how shall entity recognize revenue from contrcts with customers?
a.) As entity shall recognize revenue when (or as) the entity breaches the contractual obligation
b.) As entity shall recognize revenue when (or as) the entity satisfies a performance obligation
by transferring a promised good or service to a customer
c.) As entity shall recognize revenue when (or as) the entity enters into contactual agreement
with a customer
d.) As entity recognize when (or as) the entity enters receives the consideration from the
customer
19. Which of the following is not subject to IFRS 15?
a.) Dividends
b.) Consignment Sales
c.) Franchise
d.) Construction Contract
20. The installment method of recognizing revenue
a.) Should be used only in cases which no reasonable basis esxists for estimating the collectivity
of receivables.
b.) Is not a generally accepted accounting principle under any circumstances.
c.) Should be used for book purposes only if it is used for tax purpose.
d.) Is an acceptable alternative accounting principle for a firm that makes installment sales.
21. Franchise fees are properly recognized as revenue
a.) When received in cash.
b.) When a contractual agreement has been signed.
c.) After the franchiser has substantially performed its service.
d.) After the franchise business has begun operations.

22. Under realization principle, revenue should not be recognized until the earning process is
deemed virtually complete and :
a.) Revenue is realized
b.) Any receivable is collected
c.) Collectivity is reasonably certain
d.) Collection is absolutely assured
23. Revenue should be measured at the fair value of consideration received or receivabke.
Companies should recognize revenue when it is realized and when cash is received.
a.) Only statement 1 is correct
b.) Only statement 2 is correct
c.) Both statement are correct
d.) Both statement are not correct
24. The first ste in process for revenue recognition is to :
a.) Identify contract with the customer
b.) Determine the transaction price
c.) Identify the separate performance obligation in the contract
d.) Allocate the transaction price to the separate performance obligation
25. A performance obligation exists when
a.) A comany receives the right to receive consideration
b.) Acompany provides a distinct product or service

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 c.) Acontract is approved and signed
d.) Acompany provides interdependent product or service
PROBLEM SOLVING 3 POINTS EACH
PROLEM A. BEBEKO Construction Company signed a fixed price construction contract to build a
multi-purpose hall for BAEMO Group of Companies; the construction will start on April 1, 2018
and is expected to end on September 30, 2021. It has the following information relating to its
costs and billings:

Year Costs Incurred Estimated costs to complete Progress Billings

2018 P 1,995,000 P 2,755,000 P1,500,000
2019 1,320,000 1,785,000 3,500,000
2020 1,582,000 1,003,000 4,200,000
2021 1,503,000 ------ ?

Additional information was as follows:

a. For purposes of revenue from construction contract, the contract included an
incentive and a penalty clause. An incentive will be given to the contractor for early
completion in the amount of P120,000 for every month of early completion and
penalty of P90,000 for every week of delay caused by the contractor.
b. The contractor completed the project at the end of June 2021.
c. The Construction in Progress account at the end of the project before it was closed
amounted to P6,280,000.
d. In 2020, there was an increase in the cost of raw materials in the amount of
P145,000. A cost escalation clause was included in the contract.

In accordance with IFRS 15,

1. How much is the original contract price?

2. IF revenue is recognized over time, how much is the realized gross profit (loss) in 2019?

3. IF revenue is recognized at point in time, how much is the balance of the Construction in
progress, net of billings as of 2020?

4. IF revenue is recognized at point in time, how much is the realized gross profit (loss) in
2021?

5. IF revenue is recognized over time, how much is the realized gross profit (loss) in 2021?

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 PROBLEM B . XXXX Construction was recently awarded a fixed price contract to construct a
trade center for YYYY, Inc. XXXX Construction estimates it will take 46 months to complete the
contract. The company uses the percentage of completion method to estimate profits. (use
two decimal places for the percentage of completion, example 62.48%)

The following information details the actual and estimated costs for the year 2018-2021:

Year Actual Cost Each Year Estimated Cost to Complete

2018 P3,120,000 P3,264,000
2019 1,584,000 1,800,000
2020 1,152,000 912,000
2021 1,080,000

In 2018, XXXX Construction made its first billing to YYYY Inc. a certain percentage based on the
contract price. Accounts Receivable was debited in the amount of P2,016,000 upon first billing
made to client. During the year 2019, XXXX Construction billed its client an additional 25% of
the contract price. The December 31, 2019 balance of the Progress Billings account amount to
P3,696,000.

In accordance with IFRS 15,

6. How much is the realized gross profit (loss) in 2019?
7. How much is the balance of the Construction in Progress as of 2019?
8. Assume the REVENUE is recognized at point in time, how much is the realized gross profit
(loss) in 2020?
9. How much is the realized gross profit (loss) in 2021 if the revenue is recognized over time?

PROBLEM C. ITR has instructed by BOX to construct a shopping mall in Tawi-Tawi City on
February 23, 2017. The following information was gathered in relation to this project:
2017 2018 2019
Cost incurred P14,355, 000 P24,325,000
Percentage of completion 34% 48%
Est. cost to complete 31,759,200
RGP to date P28,520

10. How much would be the revenue recognized in 2017 IF REVENUE IS RECOGNIZED OVER
TIME?

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 PROBLEM D. CRUISERMEBABY Company builds ocean cruisers and had three different projects
as of the current year. The cost accountant got heartbroken and thus, he resigned from the
company. The owner of the company has been asking for your help. You, being unemployed for
a long time, accepted the job offer and were presented with the following information:

Cruiser 101 Cruiser 105 Cruiser 108

2017
Revenue P189,000 P192,000 P203,000
Costs incurred 125,000 191,000 203,000
Progress billings 167,200 202,000 189,760

2018
Revenue P197,000 P168,200 P203,820
RGP̸ (RGL) 22,500 12,600 -0-
Progress billings 328,250 368,720 398,750

2019
Cost incurred P138,650 P174,300 P204,520
RGP̸ (RGL) 22,540 10,280 1,890
Progress billings 536,120 558,390 578,970

11. For FS presentation purposes, determine the contract asset ̸ due from customers account
balance to be presented in the statement of financial position as of December 31, 2018.

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PROLEM E. At the beginning of 2018, a client approached JEJEMON BUILDERS to construct a mall
for P10 million pesos plus a bonus P200,000 if the project will be completed in two years. The
following information relates to the project:

REPORTED Cost incurred in 2018:

Construction materials used (including hard metals placed on site P 1,275,000
but to be used in 2019, P50,000)
Subcontractor costs 1,717,000
Borrowing costs incurred during the construction 870,000
Construction labor costs (including salary of Foreman Supervisor 1,890,000
for P535,000)
Depreciation of paint machineries used in the construction 350,000
Depreciation of idle equipment 125,000

Additional information:
 Total estimated cost at completion amounted to P8,900,000.
 At the beginning of the year, 5% mobilization fee, which is to be deducted from the last
billing has been collected by JEJE BUILDERS.
 All billings are subject to 10% contract retention.
 For the year ended, 30% billings have already been settled.
 At the end of the year, the company believes that it is highly probable that the project will
be completed for more than four years based on its past experiences with similar types of
contracts.

12. In accordance with PFRS 15, estimating variable consideration, determine the total
transaction price.
13. Determine the percentage of completion as of the end of 2018.( PUT % SIGN ON YOUR
ANSWER)
14. Compute for the total collections made by JEJEMON BUILDERS for the year ended 2018.

PROBLEM F.The following balances were ascertained for the year 2020, the first year of the contract:

Contract price P3,500,000

Cost incurred during the year 1,356,250
Estimated cost at completion 3,875,000
Additional information:

8% mobilization fee was required to be paid by the customer (deductible on the first bill)

35% of the contract was billed to the customer

85% of the amount billed was paid during the year, but subject to a 20% contract retention payable with
the final bill

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Under the overtime recognition of revenue:

15. How much is the profit or loss for the year?

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

17. How much is the total collections?

PROBLEM G
On February 10, 2020, AQUA Pool Inc., sells prefabricated pools to Mr. LIM, one of its customers, which
costs P 150,000 for P 200,000. The sales price includes an installation fee which is valued at P 20,000.
The fair value of the pool is P190,000. It is expected that it would take three months to complete. The
installation.

18. How many performance obligation(s) is (are) there in the above contract?
19. On February 10, 2020, what amount would be credited to unearned service revenue, if any?
( ROUND TO WHOLE NUMBER)

PROBLEM H
On February 14, 2020, Mitsubishi Motors Inc., enters into a contract to sell 5 units of inverted air-cons to
LUCKY CHARM Bazaar. The contract specified a delivery date of March 1, 2020. The units were not
delivered until March 14, 2020. The contract required full payment of P250,000 10 days after delivery.

20. When should the contract price be recorded?

A. FEBRUARY 14
B. MARCH 1
C. MARCH 14
D. MARCH 24

PROBLEM I. BLAKE Construction Company has consistently used the percentage of completion
method of recognizing income. During 2018 Blake entered into a fixed priced contract to
construct an office building for P10,000,000. Information relating to the contract is as follows:

At December 31

2018 2019
Estimated total cost at completion P7, 500, 000 P8, 000, 000
Income recognized (cumulative) 500, 000 1, 200, 000

21. What was the contract costs incurred in 2019?

22. What was the realized gross profit in 2019?
23. What is the percentage of completion as of the end of 2019? ( PUT % SIGN TO YOUR
ANSWER)
24. What is the percentage of completion DURING 2019? ( PUT % SIGN TO YOUR ANSWER)

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PROBLEM J. On January 1, 2020, JKL Development Corporation entered into a contract with
TUV Company to construct a new corporate headquarters on a property owned by TUV
Company. JKL determines that control of the building is passed to TUV Company as it is
constructed. Therefore, the performance obligation is satisfied over time. The contract price
is P20,000,000, but that amount will be reduced or increased depending on when construction
of the building is completed. For each day before December 31, 2022, that the building is
completed, the promised consideration will increase by P100,000. For each day after
December 31, 2022 that the building is incomplete, the promised consideration will be
reduced by P100,000.

The parties have also agreed that, when the building is complete, it will be inspected and
assigned an international certification level. If the building achieves the international
certification level specified in the contract, the contractor will be entitled to an incentive
bonus of P800,000.

On December 31, 2020, JKL determined that the expected value approach better predicts the
variable consideration it will receive regarding the early completion or delay of the
construction because of the range of possible outcomes based on JKL’s current construction
schedule and its experience on similar contracts based on past projects. JKL estimates that
there is 50% chance to complete the project 10 days ahead of schedule and receive an
incentive, 25% chance to complete the project on time and 25% chance to complete the
project five days past schedule and incur a penalty.

As of the same date, on the other hand, JKL determined that the “most likely amount” is the
better predictor to estimate the variable consideration associated with the international
certification bonus because there are only two possible outcomes (P800,000 or P0). Based on
its history of completing building projects that achieve the international certification level
specified in the contract and the absence of factors that may indicate the criteria will not be
met, JKL decided to include the bonus in the transaction price.

On December 31, 2021, JKL did not change its estimate with respect to the international
certification bonus but after evaluation of the construction completed to date and the
remaining project schedule, JKL determines it is now 75% likely to complete the project 10
days ahead of schedule and receive an incentive and 25% likely to complete the project on
time.

The following construction costs were provided by JKL for the years ended December 31, 2020
and 2021:

December 31, 2020 December 31, 2021

Costs incurred during the year P9,600,000 P3,000,000
Estimated costs to complete at P6,400,000 P5,400,000
the end of the year

25. Assuming the outcome of construction can be estimated reliably, what is the realized
gross profit/(gross loss) to be recognized by JKL for the year ended December 31, 2021?
A. P(920,000)
B. P(882,500)
C. P(1,000,000)
D. P(620,000)

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