Construction Contracts Answers Dayag 2021 PDF

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Chapter 10Problem I Number of performance obligations in the contract: 1.The separate goods and services that Precision Equipment has agreed to provide (equipment, customized software package, and consulting services) might be capable of being distinct , but they are not separately identifiable. In ...

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Chapter 10 Problem I Number of performance obligations in the contract: 1. The separate goods and services that Precision Equipment has agreed to provide (equipment, customized software package, and consulting services) might be capable of being distinct, but they are not separately identifiable . In the context of the contract, the goods and services are highly dependent on and interrelated with each other. The contractor’s role is to integrate and customize them to create one automated assembly line. Problem II Number of performance obligations in the contract: 1. Cabalen enters into a contract to construct a functioning swimming pool. The smaller components are not separately identifiable, because each component is highly interrelated with each other, as Cabalen is obligated to integrate the components into a combined final product for delivery to the customer. Problem III This contract qualifies for revenue recognition over time, because the seller is creating an asset that has no alternative use to the seller, and the seller can receive payment for its progress even if the customer cancels the contract. Problem IV A performance obligation is satisfied over time if at least one of the following three criteria is met: 1. The customer consumes the benefit of the seller’s work as it is performed, 2. The customer controls the asset as it is created, or 3. The seller is creating an asset that has no alternative use to the seller, and the seller can receive payment for its progress even if the customer cancels the contract. Under EE construction agreement with AJD, if for any reason EE can’t complete construction, AJD would own the partially completed building. Therefore, criterion 2 is satisfied, and revenue should be recognized as the building is being constructed. Problem V The expected value would be calculated as follows: Possible Amounts P35,000 (P25,000 fixed fee + P10,000 bonus) P25,000 (P25,000 fixed fee + P0 bonus) Expected contract price at inception Or, alternatively: P25,000 + (P10,000×50%) = P30,000

Probabilities × 50% = × 50% =

Expected Amounts P17,500 12,500 P30,000

Problem VI 1. Input Measure - Percentage of Completion Method (Cost to Cost Method) 2008: Contract price P 1,800,000 Actual costs to date P 450,000 Estimated costs to 1,200,000 complete Total estimated project 1,650,000 costs Estimated total gross profit 150,000 Percentage of completion: P450,000 / P,1650,000 27.27% Gross profit recognized P 40,905 2009:

P 1,800,000

Contract price Costs incurred: 2008 2009 Total cost Total gross profit Recognized in 2008 Recognized in 2009

P 450,00 1,100,000 1,550,000 250,000 40,905 P 209,095

2. Input Measure - Cost Recovery Method 2008: (all costs not yet recovered) 2009: Contract price Costs incurred: 2008 2009 Total cost Total gross profit

P -01,800,00 P 450,000 1,100,000 1,550,000 P 250,000

Problem VII 1. Input Measure - Percentage of Completion Method (Cost to cost Method) Years Gross Profit (or Loss) Supporting computations recognized 2008 P 2 million (P108 – 90) x (P30/P90) = P6 million 2009 ( P18 million) Total loss is (P108 –120) = (P12 million) To date, P6 million was recorded: therefore, (P12 million) – P6 million = (P18 million) in 2009 2010 P 10 million Total loss is P 108 – 110) = (P2 million) To date, (P 12 million was recorded: therefore, ( P2 million) – (P12 million) = P10 million in 2010

2. Input Measure - Cost Recovery Method Years 2008

Gross Profit (or Loss) P -0-

2009

(P 12 million)

2010

P 10 million

Supporting computations ( P108 – 90) = P18 anticipated gross profit, so no need to recognized a gross loss Total loss is ( P108 – 120) = (12 million) Total loss is (P108- 110) – ( P2 million) To date, ( P12 million was recorded: therefore, ( P2 million) – ( P12 million) = P10 million in 2010

Problem VIII 1. Journal Entries a. Input Measure – Percentage of completion – (cost-to-cost method)

The following analysis is to determine the percentage of completion: 20x3 Contract price: Initial amount of contract…………... Variation……………………………….. Total contract price…………………….. Costs incurred each year……………… Add: Costs incurred in prior years……. Actual costs incurred to date (1)…..… Add: Estimated costs to complete….. Total estimated costs (3)……..………… Estimated gross profit……………………

P528,000 _______P528,000 P 126,048 _______P126,048 _358,752 P484,800 P 43,200

20x4 P528,000 __12,000 P540,000 *P244,032 _126,048 *P370,080 _121,920 P492,000 P 48,000

20x5 P528,000 __12,000 P540,000 P121,920 _370,080 P492,000 _______P492,000 P 48,000

Percentage of completion (1) / (3)

26%

**74%

100%

* including the P7,200 additional costs in 20x4. ** it should be noted that the percentage of completion for 20x4 is calculated by deducting the P6,000 of materials held for the following period from the costs incurred up to that year end, i. e., P370,080 – P6,000 = P364,080, P364,080 / P492,000 = 74%.

The revenue, expenses (costs) and profit will be recognized in profit or loss as follows: 20x3 Revenue (P528,000 x 26%) Costs/Expenses (P484,800 x 26%) Gross Profit (P43,200 x 26%)

To date P 137,280 126,048 P 11,232

Recognized in prior years -

Recognized in current year P 137,280 126,048 P 11,232

20x4 Revenue (P540,000 x 74%) Costs/Expenses (P492,000 x 74%) Gross Profit (P48,000 x 74%)

To date P 399,600 _364,080 P 35,520

Recognized in prior years P 137,280 _126,048 P 11,232

Recognized in current year P 262,320 238,032 P 24,288

20x5 Revenue (P540,000 x 100%) Costs/Expenses (P492,000 x 100%) Gross Profit (P48,000 x 100%)

To date P 540,000 _492,000 P 48,000

Recognized in prior years P 399,600 _364,080 P 35,520

Recognized in current year P 140,400 _127,920 P 12,480

Alternatively, the gross profit recognized each year may also be computed as follows: Contract price: Initial amount of contract…………....... Variation…………………………………… Total contract price………………………… Costs incurred each year…………………. Add: Costs incurred in prior years……….. Actual costs incurred to date (1)…..……. Add: Estimated costs to complete……… Total estimated costs (3)……..……………. Estimated gross profit……………………… Percentage of completion (1) / (3)……... Gross profit to date…………………………. Less: Gross profit in prior years……………. Gross profit in current year -% of completion Gross profit in current year –cost recovery method

20x3

20x4

20x5

P528,000 _______P528,000 P126,048 _______P126,048 _358,752 P484,800 P 43,200 ____26% P 11,232 _______P 11,232

P528,000 __12,000 P540,000 P240,032 _126,048 P370,080 _121,920 P492,000 P 48,000 ____74% P 35,520 ___11,232 P 24,288

P528,000 12,000 P540,000 P121,920 _370,080 P492,000 _______P492,000 P 48,000 ___100% P 48,000 __35,520 P 12,480

P

P

P 48,000

0

0

Following are the entries for the years 20x3 to 20x5:

Percentage of Completion Method 20x3 1. To record costs incurred: Construction In Progress*………...... Materials Inventory………………….. Cash, payables, etc……………..

126,04 8

20x4 232,03 2

20x5 127,92 0

6,000 126,04 8

6,000 121,92 0

244,03 2

2. To record progress billings: Accounts receivable………………..

144,00 0

240,00 0

156,00 0

Progress billings*. ………………….

144,00 0

240,00 0

156,00 0

3. To record collections: Cash…………………………………..... Accounts receivable…………… 4. To recognize Revenue, Costs and Gross Profit: Construction Expenses……………… Construction in Progress*.. ……….... Revenue from Construction......

120,00 0

228,00 0 120,00 0

192,00 0 228,00 0

126,04 8

238,03 2

11,232

127,92 0

24,288 137,28 0

192,00 0

12,480 262,32 0

5. To close Construction In Progress** and Progress Billings account: Progress billings……………………… Construction In Progress………. * The term “Contract account” may alternatively be used. ** If “Contract account” is used then no entry is required for No. 5.

140,40 0

540,00 0 540,00 0

b. Input Measure – Cost Recovery Method

The following table shows the data needed for further analysis: 20x3 Contract price: Initial amount of contract…………... Variation……………………………….. Total contract price…………………….. Costs incurred each year……………… Add: Costs incurred in prior years……. Actual costs incurred to date……....… Add: Estimated costs to complete….. Total estimated costs ….……..…………

20x4

P528,000 _______P528,000 P126,048 _______P126,048 ____ _? P ?

20x5

P528,000 __12,000 P540,000 P244,032 _126,048 P370,080 ____ _? P ?

P528,000 __12,000 P540,000 P121,920 _370,080 P492,000 _______P492,000

The revenue, expenses (costs) and profit will be recognized in profit or loss as follows: 20x3 Revenue* Costs/Expenses Gross Profit * equivalent to costs incurred

To date P 126,048 126,048 P 0

Recognized in prior years -

Recognized in current year P 126,048 126,048 P 0

20x4 Revenue* Costs/Expenses Gross Profit * equivalent to costs incurred

To date P 364,080 _364,080 P 0

Recognized in prior years P 126,048 126,048 P 0

Recognized in current year P 238,032 238,032 P 0

To date

Recognized in prior years

Recognized in current year

20x5

Revenue (P540,000 x 100%)

P 540,000

P 364,080

P 175,200

Costs/Expenses (P492,000 x 100%) Gross Profit (P48,000 x 100%)

_492,000 P 48,000

364,080 P 0

127,920 P 48,000

Alternatively, the gross profit recognized each year may also be computed as follows: Contract price: Initial amount of contract…………....... Variation…………………………………… Total contract price………………………… Costs incurred each year…………………. Add: Costs incurred in prior years……….. Actual costs incurred to date ……...……. Add: Estimated costs to complete……… Total estimated costs …….…..……………. Estimated gross profit………………………. Percentage of completion……………….. Gross profit to date…………………………. Less: Gross profit in prior years……………. Gross profit in current year………………...

20x3

20x4

P528,000 _______P528,000 P 126,048 _______P 126,048 ____ _? P ? P 0 _ -___ P 0 _______P 0

P528,000 __12,000 P540,000 P244,032 _126,048 P370,080 ____ _? P ? P 0 _ -___ P 0 _______P 0

20x5 P528,000 12,000 P540,000 P 121,920 _370,080 P492,000 _______P492,000 P 48,000 ___100% P 48,000 __ 0 P 48,000

Following are the entries for the years 20x3 to 20x5: 20x3 1. To record costs incurred: Construction In Progress*………...... Materials Inventory………………….. Cash, payables, etc……………..

126,04 8

20x4 238,03 2

20x5 127,92 0

6,000 126,04 8

6,000 121,92 0

244,03 2

2. To record progress billings: Accounts receivable……………….. Progress billings*. ………………….

144,00 0

240,00 0 144,00 0

156,00 0 240,00 0

156,00 0

3. To record collections: Cash…………………………………..... Accounts receivable…………… 4. To recognize Revenue, Costs and Gross Profit: Construction Expenses……………… Construction in Progress*.. ……….... Revenue from Construction...... 5. To close Construction In Progress** and Progress Billings account: Progress billings………………………

120,00 0

228,00 0 120,00 0

126,48 0

192,00 0 228,00 0

238,03 2

192,00 0

127,92 0 48,000

126,48 0

238,03 2

175,92 0

540,00 0

Construction In Progress………. * The term “Contract account” may alternatively be used. ** If “Contract account” is used then no entry is required for No. 5.

540,00 0

2. Contract Asset/Contract Liability a. Input Measure - Percentage of Completion Method

Current Asset: Accounts receivable………………………. Other receivables: Construction In Progress………………… Less: Progress billings……………………. Contract asset Raw materials Inventory……………………

20x3 P 24,000

20x4 P 36,000

20x5 P

-

P399,600 _384,000 P 15,600 P 6,000

Current Liability: Payables (“Payments on Account”) Progress billings……………………………… Less: Construction In Progress……………. Contract Liability

P144,000 _137,280 P 6,720

Construction In Progress

Progress Billings

20x3 CI 126,048 Pr 11,232

144,000 20x3

end of x3 137,280 20x4 CI 238,032 Pr 24,288

144,000 end of x3 240,000 20x4

end of x4 399,600 20x5 CI 127,920 Pr 12,480

384,000 end of x4 156,000 20x5

540,000

540,000

540,000

540,000

where: CI - cost incurred each year Pr - profit

b. Input Measure – Cost Recovery Method

Current Asset: Accounts receivable………………………. Raw materials Inventory……………………

20x3 P 24,000

20x4 P 36,000 P 6,000

P 137,280 _144,000 P 6,720

P384,000 _364,080 P 19,920

20x5 P

-

Current Liability: Payables (“Payments on Account”) Progress billings……………………………… Less: Construction In Progress……………. Contract liability

Construction In Progress 20x3 CI 126,048 Pr 0 end of x3 126,048

Progress Billings 144,000 20x3

144,000 end of x3

20x4 CI Pr

238,032 0

240,000 20x4

end of x4 364,080 20x5 CI 127,920 Pr 48,000 540,000

384,000 end of x4 156,000 20x5

540,000

540,000

540,000

where: CI - cost incurred each year Pr - profit

3. Gross Profit a. Input Measure - Percentage of Completion Method (refer to requirement 1 for detailed

computation) Revenue……………………………………… Less: Costs / Expenses……………………... Gross Profit…………………………………….

20x3 P 137,280 _126,048 P 11,232

20x4 P 262,320 _238,032

20x5 P 140,400 _127,920

P 24,288

P 12,480

b. Input Measure – Cost Recovery Method (refer to requirement 1 for detailed

computation) Revenue……………………………………… Less: Costs / Expenses……………………... Gross Profit…………………………………….

20x3 P 126,048 _126,048 P 0

20x4 P 238,032 _238,032 P 0

20x5 P 175,920 _127,920 P 48,000

Problem IX 1. Anticipated/Gross Loss a. Input Measure – Percentage of Completion (Cost-to-Cost Method) 20x4: Contract price Actual cost to date

P2,500,000 P1,500,00 0 1,200,000

Estimated costs to complete Total estimated project costs Estimated loss, recognized in 20x4

2,700,000 P (200,000)

a.

Input 20x5: Contract price Costs incurred:

P 2,500,000 In 20x4 In 20x4

Total cost Total loss Recognized in 20x4 Recognized in 20x5 Measure – Cost Recovery Method Loss in 20x4

P1,500,00 0 1,300,000 2,800,000 P (300,000) (200,000) P (100,000) P( 200,000)

Loss in 20x5

P (100,000)

2. Journal Entries a. Input Measure – Percentage of Completion (Cost-to-Cost Method) 20x4: Construction in progress Various credits

1,500,000 1,500,000

Accounts receivable Billings on construction contract

1,200,000

Cash Accounts receivable

1,000,000

Cost of construction Construction in progress (loss) Revenue from long-term contracts* 20x5: Construction in progress Various credits

1,588,889

1,200,000

1,000,000

200,000 1,388,889 1,300,000 1,300,000

Accounts receivable Billings on construction contract

1,300,000

Cash

1,500,000

1,300,000

Accounts receivable Cost of construction Construction in progress (loss) Revenue from long-term contracts** Billings on construction contract Construction in progress (P1,500,000/P2,700,000) ** P2,500,000 1,388,889

1,500,000 1,211,111 100,000 1,111,111

2,500,000 2,500,000

*P2,500,000

Problem X Item to compute Total revenue recognized during 2009 (w): CIP contains cost + gross profit = revenue, so w = P50 Gross profit recognized during 2009 (x): P50 – P35 = P15 Billings on construction (y) : P14 + P 46 = P60 Net billings in excess of construction in progress (z): Billings of P60 – CIP of P50 Calculate the percentage of PAC that was completed during 2009: 50/150 = 33.33%

Problem XI Item to compute (in Millions) 1. Cash collected by KP on Cincy One during 20x5. (P75 billings –

Answer P50 million P 15 million P60million P10 million

333.33%

Answer P65 million

P10 A/R) 2. Actual costs incurred by KP on Cincy One during 2009 (P66 CIP – P22 gross pofit) 3. At 12/31/20x5, the estimated remaining costs to complete Cincy One (44/{44 + x})(300 – {44 + x}) = 22; x = 156 4. The percentage of Cincy One that wa completed during 20x5 100 x (44/ {44 + 156})

P44 million P156 million 22%

Problem XII

1. Progress billings on construction contract Less accounts receivable Cash collected in 20x4

P562,000 150,500 P411,500

2. Gross profit from construction contract + Construction in progress = Revenue for 20x4 P301,000 + P602,000 = P903,000 P903,000/P7,525,000 = 12% Percentage completed in 20x4 P301,000/.12 = P2,508,333 Estimated income on construction contract Problem XIII 1. Percentage of Completion Method (Cost-to-cost Approach) 20x4 20x5 Contract price ................... P250,000 P250,000 Current year costs ............... 110,000 120,000 Costs to date .................... 110,000 230,000 Estimated cost to complete ....... 100,000 20,000 Estimated total cost ............. 210,000 245,000 Estimated total gross profit ..... 40,000 5,000 Percent complete ................. 52% 94% Revenue to date .................. P130,000 P230,000

20x6 P250,000 15,000 245,000 0 240,000 5,000 100% P250,000

20x4:

Revenue Costs (110/210 x 210) Gross profit

To Date at Dec. 31 P130,000 110,000 P 20,000

20x5:

Revenue Costs (230/245 x 245) Gross profit (loss)

P235,000 230,000 P 5,000

P130,000 110,000 P 20,000

P105,000 120,000 P(15,000)

20x6:

Revenue Costs Gross profit

P250,000 245,000 P 5,000

P235,000 230,000 P 5,000

P 15,000 15,000 P 0

20x4 1. 2. 3. 4.

Revenue recognized during the year Gross profit recognized during the year Balance in the construction in progress account at Dec. 31 . Balance in the progress

P130,000

Previous Years

Current Year P130,000 110,000 P 20,000

20x5 P100,000

20x6 P15,000

20,000

(15,000)

0

130,000

235,000

0

5.

billings account at Dec. 31 . Net (3-4) or (4-3) – due from (due to)

125,000 5,000

250,000 (15,000)

0 0

2. Cost Recovery Method 20x4 1. 2. 3. 4. 5.

Revenue recognized during the year Gross profit recognized during the ...