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PRACTICAL ACCOUNTING 2
Monday, July 20, 2015 About Me
Accounting 2012
LONG-TERM CONSTRUCTION CONTRACTS
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LONG-TERM CONSTRUCTION CONTRACTS
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▼ 2015 (16)
In accounting for long-term construction contracts (those taking longer than one year to complete), the two
methods commonly followed are percentage-of-completion and completed-contract. ►
► September (2)
(a) The revenue recognized on a long-term construction contract under the percentage-of-completion method is ▼
▼ July (10)
determined by applying a percentage representing the degree of completion to the total contract price at the INSTALLMENT SALES
end of the accounting period. The percentage may be derived by dividing the costs incurred to date by the
LONG-TERM CONSTRUCTION
total estimated costs of the entire contract based on the most recent information. The revenue so derived is CONTRACTS
then reduced by the direct contract costs to determine the gross profit recognized in the initial period.
TOA3
In subsequent periods, since the percentage-of-completion method described produces cumulative results,
revenue and gross profit recognized in prior periods must be subtracted to obtain current revenue and gross TOA2
profit to be recognized. TOA1
Under the completed-contract method, no earnings are recognized until the contract is substantially STANDARD COSTING - Variance
completed. For the period in which completion occurs, gross revenues include the total contract price. Total Analysis
job costs incurred are deducted from gross revenues, resulting in recognition of the entire amount of gross ABC and STANDARD COSTING
profit in the completion period. If it is expected that a loss will occur on the contract, a provision for loss
LINK: PROCESS COSTING, FOREX
should be recognized immediately under both the completed-contract method and the percentage-of-
AND HEDGING, and MAS ...
completion method.
(b) The percentage-of-completion method should be used when estimates of the bases upon which progress is Joint Products Cost
measured are reasonably dependable and all the following conditions exist: Just In Time
1. The contract clearly specifies the enforceable rights regarding goods or services to be provided and
received by the parties, the consideration to be exchanged, and the manner and terms of settlement. ►
► June (4)
2. The buyer can be expected to satisfy all obligations under the contract.
3. The contractor can be expected to perform the contractual obligation.
The completed-contract method should be used when inherent hazards or lack of dependable estimates cause
the forecasts to be of doubtful value.
(c) Under the percentage-of-completion method, a schedule is made of the contracts in process, showing the
total costs incurred as of the end of a given period, the estimated gross profit recognized based on the
degree of completion, and the total billings rendered on each individual contract. If costs incurred plus
recognized profits exceed the related billings on a contract, this net figure is shown as a current asset. This
treatment shows that the contractor has not fully billed the customer for work performed to date and has a
claim against the customer for that portion of work completed but not yet billed. If billings on a contract
exceed costs incurred plus estimated profits, this net figure is shown as a current liability, which means that
the contractor has overbilled the customer for work done to date and must complete the work represented
by the excess billings.
Under the completed-contract method, the treatment of excess costs and billings is the same as under the
percentage-of-completion method except that estimated profits are not computed because profit recognition
is deferred until a contract is completed. The excess of costs over related billings on a contract is a current
asset while the excess of billings over related costs on a contract is a current liability.
PROBLEM 1
Waya Construction Co. has used the cost to cost percentage of completion method of recognizing profits.
Lia Ortega assumes leadership of the business after the retirement of her mother Lyca. In reviewing the
records, Lia finds the following information regarding a recently completed building project for which the
total contract was P500,000.
2009 2010 2011
Gross Profit (loss) P10,000 P35,000 P(5,000)
Cost incurred/year 90,000 ? P205,000
Lia wants to know how effectively the company operated during the last three years on this project and,
since the information is not complete, has asked you to help by answering the following questions
a. How much cost was incurred in 2010?
b. What percentage of the project was completed by the end of 2010?
c. What was the total estimated gross profit on the project by the end of 2010?
d. What was the estimated cost to complete the project at the end of 2010?
e. What percentage of the project was completed by the end of 2009?
PROBLEM 2
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Prepare the necessary entries for each year, assuming the firm uses the:
PROBLEM 3
Solidrock Construction contracted to build a ship over a two year period. The contract price was
P21,000,000 with an estimate total cost of P18,400,000. The following cost data relate to the construction
period.
Prepare the necessary journal entries for 2009, 2010, and 2011 assuming Solidrock uses the percentage-of-
completion method.
PROBLEM 4
Sealand Construction entered into a contract to construct a floating bridge across a lake. The contract price
for the bridge is P7,500,000. During 2009, costs of P1,800,000 were incurred representing 30% of total
expected costs.
Prepare the necessary entries for 2009 to recognize gross profit for the year assuming the firm uses the
PROBLEM 5
. In 2009, Mandaluyong Builders began construction work under a three-year contract at a price of
P7,525,000. The firm uses the percentage-of-completion method for financial accounting purposes. The
income to be recognized each year is based on the proportion of cost incurred to the total estimated costs
for completing the contract. The financial statement presentations relating to this contract on December 31,
2009, are:
Balance Sheet
Accounts receivable ........................ P150,500
Construction in progress ................... P602,000
Less progress billings ..................... 562,000 40,000
Income Statement
Gross profit on construction contracts ..... P301,000
Determine the
(1) cash collected in 2009.
(2) estimated income on the construction contract.
PROBLEM 6
On January 1, 2009, Jaguar Enterprises obtained a contract to construct a building. It was estimated at the
beginning of the contract that it would take three years to complete the project at an expected cost of
P200,000. The contract price was P250,000. The following information describes the status of the job at the
close of production each year:
Compute the items listed below for each year assuming the use of the percentage-of-completion cost-to-
cost method. (Round all percentages to two decimals).
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PROBLEM 7
On January 1, 2009, Boston Inc. obtained a contract to construct a building. It was estimated at the
beginning of the contract that it would take 3 years to complete the project at an expected cost of P200,000.
The contract price was P250,000. The following information describes the status of the job at the close of
production each year:
Compute the items listed below for each year assuming the use of the percentage-of- completion cost-to-
cost method. (Round all percentages to two decimals.)
Multiple Choice Identify the choice that best completes the statement or answers the question.
____ 1. How should the balances of Progress Billings and Construction in Progress be shown at reporting dates prior
to the completion of a long-term contract?
a. Progress Billings as income, Construction in Progress as inventory.
b. Net, as income from construction if credit balance, and loss from construction if debit balance.
c. Progress Billings as deferred income, Construction in Progress as a current asset.
d. Net, as a current asset if debit balance and current liability if credit balance.
____ 2. If the percentage-of-completion method is used, what is the basis for determining the gross profit to be
recognized in the second year of a three-year contract?
a. Cumulative actual costs incurred only.
b. Incremental cost for the second year only.
c. Cumulative actual costs and estimated costs to complete.
d. No gross profit would be recognized in year 2.
____ 3.. If the completed-contract method is used, what is the basis for determining the income to be recognized in the
second year of a three-year contract?
____ 4. Which of the following would be used in the calculation of the gross profit recognized in the third and final
year of a construction contract that is accounted for using the percentage-of-completion method?
Actual Income
Contract Total Previously
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____ 5. Assume the percentage-of-completion method of revenue recognition is used on a long-term construction
contract. Under this method, revenues that are earned but unbilled at the balance sheet date should be
disclosed
a. as a long-term receivable in the noncurrent assets section of the balance sheet.
b. only as a footnote disclosure until the customer is billed for the percentage of work completed.
c. as construction in progress in the current assets section of the balance sheet.
d. as construction in progress in the noncurrent assets section of the balance sheet.
____ 6. The completed-contract method of accounting for long-term construction-type contracts is preferable when
a. a contractor is involved in numerous projects.
b. the contracts are of a relatively long duration.
c. estimates of costs to complete and extent of progress toward completion are reasonably dependable.
d. there are inherent uncertainties in the contract beyond normal business risks.
____ 7. Which of the following is not a difference between the percentage-of completion and completed-contract
methods of accounting for long-term construction contracts?
a. They report different amounts for inventory during the construction period.
b. They report different amounts for progress billings during the construction period.
c. They cause a different cash inflow during the construction period.
d. They report different amounts for accounts receivable during the construction period.
____ 8. The theoretical support for using the percentage-of-completion method of accounting for long-term
construction projects is that it
a. is more conservative than the completed-contract method.
b. reports a lower Net Income figure than the completed-contract method.
c. more closely conforms to the cost principle.
d. produces a realistic matching of expenses with revenues.
____ 9. If a company uses the completed-contract method of accounting for long-term construction contracts, then
during the period of construction, financial information related to a long-term contract will
a. appear on both the income statement and balance sheet during the construction period.
b. appear only on the income statement during the period of construction.
c. appear only on the balance sheet during the period of construction.
d. not appear on the financial statements.
____ 10. When the percentage-of-completion method of accounting for long-term construction projects is used, why is
Construction in Progress increased by the annual recognized gross profit on long-term construction
contracts?
a. The cost of the contract has increased.
b. The project's value has increased above cost.
c. The economy experiences inflation over the construction period.
d. Construction in Progress is not increased by the annual recognized profit.
____ 11. When comparing the percentage-of-completion and completed-contract methods of accounting for long-term
construction contracts, both methods will report
a. the same balances each period in the Progress Billings account.
b. the same expense for cost of construction each year.
c. the same amount of income in the year of completion.
d. the same inventory carrying value each year during the construction period.
____ 12. A company uses the percentage-of-completion method to account for a four year construction contract.
Progress billings sent in the second year that were collected in the third year would
a. be included in the calculation of the income recognized in the second year.
b. be included in the calculation of the income recognized in the third year.
c. be included in the calculation of the income recognized in the fourth year.
d. not be included in the calculation of the income recognized in any year.
____ 13. In accounting for a long-term construction contract for which there is a projected profit, the balance in the
Construction in Progress account at the end of the first year of work using the percentage-of-completion
method would be
a. zero.
b. the same as the completed-contract method.
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____ 14. On May 1, 2009, Pateros Construction Company entered into a fixed-price contract to construct an apartment
building for P3,000,000. Pateros appropriately accounts for this contract under the percentage-of-
completion method. Information relating to the contract is as follows:
2009 2010
At December 31:
Percentage of completion ........ 20% 60%
Estimated costs at completion ... P2,250,000 P2,400,000
Income recognized (cumulative) .. P 150,000 P 360,000
What is the amount of contract costs incurred during the year ended December 31, 2010?
a. P600,000
b. P960,000
c. P990,000
d. P1,440,000
____ 15. Navotas Construction, Inc. has consistently used the percentage-of-completion method of recognizing
income. Last year Navotas started work on a P4,500,000 construction contract, which was completed this
year. The accounting records disclosed the following data for last year:
How much income should avotas have recognized on this contract last year?
a. P105,000
b. P150,000
c. P300,000
d. P350,000
____ 16. Caloocan Construction, Inc. has consistently used the percentage-of-completion method of recognizing
income. During 2009, Caloocan started work on a P1,500,000 fixed-price construction contract. The
accounting records disclosed the following data for the year ended December 31, 2009:
a. P15,000
b. P35,000
c. P50,000
d. P115,000
____ 17. Pasay Construction Company has consistently used the percentage-of- completion method. On January 10,
2009, Pasay began work on a P3,000,000 construction contract. At the inception date, the estimated cost of
construction was P2,250,000. The following data relate to the progress of the contract:
How much gross profit should Pasay recognize for the year ended December 31, 2010?
a. P150,000
b. P262,500
c. P300,000
d. P450,000
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____ 19. Makati Construction Company uses the percentage-of-completion method of accounting. In 2009, Makati
began work on a project which had a contract price of P1,600,000 and estimated costs of P1,200,000.
Additional information is as follows:
2009 2010
Costs incurred during the year ............ P240,000 P1,060,000
Estimated costs to complete, as of 960,000
12/31/09 ................................
Billings during the year .................. 290,000 1,310,000
Collections during the year ............... 250,000 1,200,000
The amount of gross profit Makati should recognize on this contract during 2009 is
a. P40,000.
b. P80,000.
c. P100,000.
d. P200,000.
____ 20. Pasig Construction Company uses the percentage-of-completion method for long-term construction contracts.
A specific job was begun in 2009 and completed in 2011. The contract price was P1,400,000 and cost
information as of each year-end is given below:
Assuming Pasig correctly recorded gross profit in 2009, how much gross profit should the company record
in 2010?
a. P0
b. P20,000
c. P300,000
d. P320,000
The following data relate to a construction job started by Valenzuela Co. during 2009:
____ 21.Under the completed-contract method, how much should Valenzuela recognize as gross profit for 2009?
a. P0
b. P30,000
c. P40,000
d. P90,000
____ 22. Under the percentage-of-completion method, how much should Valenzuela recognize as gross profit for 2009?
a. P0
b. P40,000
c. P80,000
d. P100,000
____ 23. Violet Construction Company uses the percentage-of-completion method for long-term construction
contracts. The company started a project with a contract price of P2,750 in 2009. Given the following data,
what is the balance in Construction in Progress for this contract at the end of 2009?
2009 2010
Costs incurred this year .................. P 400 P 500
Total estimated costs remaining at end
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a. P150
b. P400
c. P550
d. P1,750
____ 24. Silver Construction Company uses the percentage-of-completion method for long-term construction contracts.
The company has a project with a contract price of P7,000 on which P600 of gross profit has been
recognized in prior years. Information for the current year is as follows:
What is the loss that Silver should recognize in the current year?
a. P600
b. P800
c. P1,400
d. No loss should be recognized.
____ 25. In 2009, Konstrak Corp. began construction work under a three-year contract. The contract price is P800,000.
Konstrak used the percentage-of-completion method for financial accounting purposes. The income to be
recognized each year is based on the proportion of costs incurred to total estimated costs for completing the
contract. The financial presentations relating to this contract at December 31, 2009, appear below.
Balance Sheet
Accounts receivable--construction contract
billings .................................. P15,000
Construction in progress .................... P50,000
Less contract billings ...................... (47,000)
Cost of uncompleted contract in excess of
billings .................................. 3,000
Income Statement
Income (before tax) on the contract
recognized in year 1 ...................... P10,000
a. P32,000
b. P35,000
c. P47,000
d. P50,000
1. D
2. C
3. D
4. B
5. C
6. D
7. C
8. D
9. C
10. B
11. A
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12. D
13. C
14. C
15. B
16. C
17. A
18. D
19. B
20. B
21. A
22. B
23. C
24. C
25. A
PROBLEM 2
(1)
2009
Construction in Progress 750,000
....................
Materials, Cash, etc. 750,000
.....................
Cash 450,000
........................................
Accounts Receivable 450,000
.......................
2010
Construction in Progress 2,700,000
....................
Materials, Cash, etc. 2,700,000
.....................
Cash 3,300,000
........................................
Accounts Receivable 3,300,000
.......................
2011
Construction in Progress 630,000
....................
Materials, Cash, etc. 630,000
.....................
Cash 1,350,000
........................................
Accounts Receivable 1,350,000
.......................
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(2)
2009
Construction in Progress 750,000
....................
Materials, Cash, etc. 750,000
.....................
Cash 450,000
........................................
Accounts Receivable 450,000
.......................
2010
Construction in Progress 2,700,000
....................
Materials, Cash, etc. 2,700,000
.....................
Cash 3,300,000
........................................
Accounts Receivable 3,300,000
.......................
2011
Construction in Progress 630,000
....................
Materials, Cash, etc. 630,000
.....................
Cash 1,350,000
........................................
Accounts Receivable 1,350,000
.......................
PROBLEM 3
2009
Construction in Progress 9,000,000
....................
Materials, Cash, etc. 9,000,000
.....................
Cash 7,500,000
........................................
Accounts Receivable 7,500,000
.......................
2010
Construction in Progress 9,500,000
....................
Materials, Cash, etc. 9,500,000
.....................
Cash 9,000,000
........................................
Accounts Receivable 9,000,000
.......................
2011
Accounts Receivable 2,000,000
.........................
Progress Billings on Construction 2,000,000
Contracts
Cash 4,500,000
........................................
Accounts Receivable 4,500,000
.......................
PROBLEM 4
(1)
Using the completed-contract method, no gross profit is recognized on the contract until the bridge is
completed. Thus, no entry is needed.
(2)
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PROBLEM 5
(1)
Progress billings on construction contract ............ P562,000
Less accounts receivable .............................. 150,500
Cash collected in 2009 ................................ P411,500
(2)
Gross profit from construction contract + Construction in progress =
Revenue for 2009
P301,000 + P602,000 = P903,000
P903,000/P7,525,000 = 12% Percentage completed in 2009
P301,000/.12 = P2,508,333 Estimated income on construction contract
PROBLEM 6
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4. Balance in accounts
receivable
at Dec. 31 (after closing 10,000 10,000 0
entries)
-END-
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