AFAR “Innovating

LONG-TERM CONSTUCTION CONTRACTS Educational

Services”
ANDREW T. CHAG-USEN

ILLUSTRATIVE APPLICATIONS

Problem 1.
Space X Development Corp. won the bid to build SM City Milkyway, the first mall ever to
be constructed outside a planet to serve extra-terrestrial beings. The project is to run over
a period of 2 years for a price of P8,000,000. Information relating to the performance of
the contract is summarized as follows:

The details of the costs incurred to date in the first year are

Site labor costs 400,000.00

Cost of construction material 800,000.00
Depreciation of special plant and equipment specifically used
in constructing the SM Milkyway 300,000.00
Depreciation of other plant and equipment used for the
construction project 150,000.00
Marketing and selling costs generate proper exposure 500,000.00
Total estimated contract cost 3,500,000.00

Year 1 Year 2
Construction costs incurred during the year ? 4,100,000
Estimated costs to complete ?
Billings during the year 1,200,000 4,800,000
Collections during the year 1,000,000 3,700,000

Required:
(1) Calculate the following:
a. percentage of completion,
b. amounts of revenue,
c. costs,
d. and gross profit to be recognized.

(2) Prepare the entries under the percentage of completion.

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AFAR LONG-TERM CONSTRUCTION CONTRACTS. Illustrative Applications

SUGGESTED SOLUTION
Year 1
Total construction costs incurred to date
Site labor cost 400,000.00
Construction materials 800,000.00
Depreciation – Special PPE 300,000.00
Depreciation - Ordinary PPE, used
for the project 150,000.00 1,650,000.00
Divide by Total Estimated cost 3,500,000.00
Percentage of competion 47.14%

Divide by Total Estimated cost 3,500,000.00

Less: Cost incurred to date (1,650,000.00)
Estimated cost to complete 1,850,000.00

Contract Price 8,000,000.00

Multiply by Percentage of completion 47.14%
Contract Revenue 3,771,428.57
Less: Cost incurred to date 1,650,000.00
Gross profit to date 2,121,428.57

Year 2
Contract Price 8,000,000.00
Cost incurred to date 5,750,000.00
Estimated cost to complete -
Total cost 5,750,000.00
Gross Profit 2,250,000.00
Multiply by: Percentage of completion 100%
Gross Profit to date 2,250,000.00
Less: Gross Profit - Prior periods (2,121,428.57)
Gross Profit - Current Period 128,571.43

Journal Entries
Year 1
Construction in Progress 1,650,000.00
Cash / Accounts Payable 1,650,000.00
To record construction costs incurred.

Accounts Receivable 1,200,000.00

Progress Billings 1,200,000.00
To record billings made.

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AFAR LONG-TERM CONSTRUCTION CONTRACTS. Illustrative Applications
Cash 1,000,000.00
Accounts Receivable 1,000,000.00
To record collection of account.

Construction Costs 1,650,000.00

Construction in Progress 2,121,428.57

Contract Revenue 3,771,428.57

To record recognition of gross profit.

Year 2
Construction in Progress 4,100,000.00
Cash / Accounts Payable 4,100,000.00
To record construction costs incurred.

Accounts Receivable 4,800,000.00

Progress Billings 4,800,000.00
To record billings made.

Cash 3,700,000.00
Accounts Receivable 3,700,000.00
To record collection of account.

Construction Costs 4,100,000.00

Construction in Progress 128,571.43
Contract Revenue 4,228,571.43
To record recognition of gross profit.

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AFAR LONG-TERM CONSTRUCTION CONTRACTS. Illustrative Applications

Problem 2.
Centrala Builders, Inc. has consistently used the percentage of completion method of
accounting for construction-type contracts. During Year 1 Centrala started work on a
P9,000,000 fixed-price construction contract expected to be completed in Year 3.
Centrala’s accounting reCentralas disclosed the following:

December. 31
Year 1 Year 2
Cumulative contract costs incurred P3,510, 000 P6, 075, 000
Estimated total cost at completion 7, 800, 000 8, 100, 000

How much income would Centrala have recognized on this contract for the year ended
December 31, Year 2?

SUGGESTED SOLUTION
Year 1 Year 2
Contract Price 9,000,000.00 9,000,000.00
Less: Estimated Total cost 7,800,000.00 8,100,000.00
Estimated Gross Profit 1,200,000.00 900,000.00
Multiply by Percentage of completion 45.00% 75.00%
Gross profit to date 540,000.00 675,000.00
Less: gross profit – Prior years 540,000.00
Gross profit – current year 540,000.00 135,000.00

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AFAR LONG-TERM CONSTRUCTION CONTRACTS. Illustrative Applications

Problem 3.
State Co. recognizes construction revenue and expenses using the percentage-of-
completion method. During Year 1, a single long-term project was begun, which
continued through Year 2. Information on the project follows:

Year 1 Year 2
Accounts receivable from construction
100,000.00 300,000.00
contract
Construction expenses 150,000.00 192,000.00
Construction in progress 122,000.00 364,000.00
Partial billings on contract 100,000.00 420,000.00

Profit recognized from the long-term construction contract in Year 2 should be

SUGGESTED SOLUTION
Year 1 Year 2
Construction in progress 122,000.00 364,000.00
Construction expenses to date (150,000.00) (342,000.00)
Gross profit to date (28,000.00) 22,000.00
Gross profit – prior years 28,000.00
Gross profit – current year (28,000.00) 50,000.00

Note: The construction in progress account is the accumulation of construction expenses

incurred and the gross profit recognized.

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AFAR LONG-TERM CONSTRUCTION CONTRACTS. Illustrative Applications

Problem 4.
The following data pertaining to Bonnie Co.’s construction jobs, which commenced
during Year 1 and reflected the following:

Project 1 Project 2
Contract price P420,000 P300,000
Costs incurred during Year 1 240,000 280,000
Estimated costs to complete 120,000 40,000
Billed to customers during Year 1 150,000 270,000
Received from customers during Year 90,000 250,000
1

At the end of Year 2, the following information is available:

Project 1 Project 2
Change in contract price: 50,000
Increase/(Decrease)
Costs incurred up to Year 2 360,000 294,000
Estimated costs to complete 90,000 6,000

1. If Bonnie used the percentage-of-completion method, what amount of gross profit

(loss) would Bonnie report in its Year 1 and Year 2 statement of profit or loss?
2. If Bonnie used the cost recovery method, what amount of gross profit (loss) would
Bonnie report in its Year 1 and Year 2 statement of profit or loss?

SUGGESTED SOLUTION
Percentage of competion
Year 1
Project 1 Project 2 Total
Contract Price 420,000.00 300,000.00 720,000.00
Cost incurred to date 240,000.00 280,000.00 520,000.00
Estimated cost to complete 120,000.00 40,000.00 160,000.00
Total estimated cost at completion 360,000.00 320,000.00 680,000.00
Total estimated gross profit (loss) 60,000.00 (20,000.00)
Multiply by Percentage of completion 66.67% -
Gross profit (loss) 40,000.00 (20,000.00) 20,000.00

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AFAR LONG-TERM CONSTRUCTION CONTRACTS. Illustrative Applications
Year 2
Project 1 Project 2 Total
Contract Price 420,000.00 300,000.00 720,000.00
Cost incurred to date 360,000.00 294,000.00 654,000.00
Estimated cost to complete 90,000.00 6,000.00 96,000.00
Total estimated cost at completion 450,000.00 300,000.00 750,000.00
Total estimated gross profit (loss) (30,000.00) 0.00
Multiply by Percentage of completion - -
Gross profit (loss) to date (30,000.00) 0.00 (30,000.00)
Gross profit (loss) - Prior Year (40,000.00) 20,000.00 (20,000.00)
Gross profit (loss) - Current Year (70,000.00) 20,000.00 (50,000.00)

Cost Recovery Method

Year 1
Contract Price – Project 2 300,000.00
Total estimated cost at completion – Project 2 (320,000.00)
Contract loss (20,000.00)
*No profit to be recognized from project 1 because the total revenue to be recognized is
only up to the cost incurred.
*For project 2, however, the estimated contract loss must be recognized immediately.

Year 2
Contract Price – Project 1 420,000.00
Total estimated cost at completion –
Project 1 (450,000.00)
Contract loss (30,000.00)
Gross profit (loss) - Prior Year 0.00
Gross profit (loss) - Current Year (30,000.00)

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AFAR LONG-TERM CONSTRUCTION CONTRACTS. Illustrative Applications

Problem 5.
Mountain Province, Inc. began operation of its construction division on October 1, Year 1,
and entered into contracts for two separate projects. Project Pulag’s contract price was
P600,000 and provided for penalties of P10,000 per week for late completion. Project
Pulag was two weeks behind schedule as of Year 2, and it was completed five weeks late
in August Year 3. Project Kiltepan’s original contract price was P800,000. Change orders
during Year 3 added P40,000 to the original contract price.

The following data pertains to the separate long-term construction projects in progress:

Pulag Kiltepan
As of September 30, Year 2:
Costs incurred to date P360,000 P410,000
Estimated costs to complete 40,000 410,000
Billings 315,000 440,000
Cash collections 275,000 365,000

As of September 30, Year 3:

Costs incurred to date 450,000 720,000
Estimated costs to complete -- 180,000
Billings 560,000 710,000
Cash collections 560,000 625,000

Required:
Determine the amount gross profit (loss) to be recognized by Mountain Province, Inc. for
the years ended September 30, Year 2, and Year 3, under the percentage-of-completion
method.

Mountain Province, Inc.

Year 1
Pulag Kiltepan Total
Contract price 600,000.00 800,000.00 1,400,000.00
Less: Estimated Total costs 400,000.00 820,000.00 1,220,000.00
Estimated Gross Profit (loss) 200,000.00 (20,000.00) 180,000.00
Multiply by Percentage of completion 90.00%
Gross profit (loss) to date 180,000.00 (20,000.00) 160,000.00
Gross profit (loss) – prior years - -
Gross profit – current year 180,000.00 (20,000.00) 160,000.00
Penalties
Gross profit – current year after pentalties 180,000.00 (20,000.00) 160,000.00

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AFAR LONG-TERM CONSTRUCTION CONTRACTS. Illustrative Applications

Year 2
Pulag Kiltepan Total
Contract price 600,000.00 840,000.00 1,440,000.00
Less: Estimated Total costs 450,000.00 900,000.00 1,350,000.00
Estimated Gross Profit (loss) 150,000.00 (60,000.00) 90,000.00
Multiply by Percentage of completion 100.00%
Gross profit (loss) to date 150,000.00 (60,000.00) 90,000.00

Gross profit (loss) – prior years (180,000.00) 20,000.00

Gross profit – current year (30,000.00) (40,000.00) (70,000.00)
Penalties (50,000.00)
Gross profit – current year after pentalties (80,000.00) (40,000.00) (120,000.00)

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