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ATENEO DE NAGA UNIVERSITYCOLLEGE OF BUSINESS AND ACCOUNTANCYADVANCED ACCOUNTING IJ. I. AVILALONG-TERM CONSTRUCTION CONTRACTILLUSTRATIONILLUSTRATIVE PROBLEM I Journal entries  Realized gross profit  Progress billings/construction in progress balanceThe Rockney Construction Company has a 3-year con...

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ATENEO DE NAGA UNIVERSITY COLLEGE OF BUSINESS AND ACCOUNTANCY ADVANCED ACCOUNTING I J. I. AVILA LONG-TERM CONSTRUCTION CONTRACT ILLUSTRATION ILLUSTRATIVE PROBLEM I  Journal entries  Realized gross profit  Progress billings/construction in progress balance The Rockney Construction Company has a 3-year contract to construct a bridge. The contract price is P1,000,000. The following data pertains to the construction period:

Costs to date Estimated costs to complete Progress billings each year Collections of billings each year

2012 P270,000 630,000 400,000 350,000

2013 P720,000 80,000 400,000 400,000

2014 P810,000 200,000 250,000

REQUIRED: Using the (1) percentage-of-completion method and the (2) hybrid method: 1. Compute the profit to be recognized each year. 2. Prepare required journal entries each year. 3. Determine the balance of construction in progress/progress billings at the end of each year. ILLUSTRATIVE PROBLEM II  Output basis Jamaica Construction Company was engaged on January 2, 2014 to construct a building for a price of P4,200,000 payable in five installments. One-fifth of the price was to be paid upon completion of each quarter of the work, with the final payment due within a week after the turnover and acceptance of the building. By December 31, 2014, three quarters of the building was completed which was estimated by the company’s architect and civil engineers, where upon the third billing was made (cash had been received for the previous two billings). During 2014, a total of P2,100,000 had been disbursed for costs incurred, and total liability for construction materials purchased still amounted to P500,000. It is estimated that an additional P900,000 would be required to finish the construction of the building. Using the percentage of completion REQUIREMENTS: Determine the following under (1) input method or cost to cost method and (2) output method or based architect’s or engineer’s estimate or the year 2014 a. Realized gross profit b. Balance of construction in progress/progress billings ILLUSTRATIVE PROBLEM III  Estimated Gross loss In April 2013, LJ Company began work in a project that has contract price of P5,000,000. Any costs incurred are expected to be recoverable. Progress billing, collections are of equal with costs incurred.

Cost incurred to date

2013 P1,125,000

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2014 P 3,825,000

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Estimated cost to complete Total estimated costs

3,375,000 P4,500,000

1,275,000 P 5,100,000

REQUIREMENTS: 1. Determine the following for the year 2013 and 2014 a. Realized gross profit/loss under percentage and cost recovery method/hybrid method b. Balance of construction in progress/progress billings under percentage and cost recovery method/hybrid method

ILLUSTRATIVE PROBLEM IV  Contract Retentions In 2013, SMDC Construction Company was contracted to build ZULU Company’s private road network for P100 million. The project was estimated to be completed in two years, and the contract provided for: 1. 5% mobilization fee (to be deducted from the last billing) payable within 15 days after signing of the contract. 2. 10% retention provision on all billings, and 3. Payment for progress billings within 10 days from acceptance. SMDC, which uses the percentage of completion method of accounting, estimated a 25% gross margin on the project. By the end of 2013, SMDC had presented progress billings corresponding to 50% completion. All of the progress billings presented in 2013 were accepted, except the last one for 10% which was accepted on January 5, 2014. With the exception of one bill for 8% which was due on January 7, 2014, all of the billings accepted in 2013 were settled. What is the total payment made by ZULU in 2013? P33,800,000 SOLUTIONS: Problem I: (1)Realized Profit

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(2) Journal Entries

2012

2013

2014

a. Incurrence of costs Construction In Progress (CIP)…………… Cash………………………………. b. Billings Accounts Receivable……………………… Progress Billings( PB)…………… c. Collection Cash………………………………………. Accounts Receivable…………….. d. Revenue Recognition Percentage of Completion CIP …………………………………………… Cost of LTC…………………………………… Revenue from LTC……………………… Hybrid Method CIP ………………………………………….. Cost of LTC…………………………………… Revenue from LTC……………………… Revenue from LTC……………………… e. Closing Entries PB………………………………………………. CIP……………………………………….

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