1. Contract revenue in construction contract comprises

a.The initial amount of revenue agreed in the contract

b.The initial amount of revenue agreed in the contract and progress billings.

c.Variation in contract work, claim and incentive payment

d.The initial amount of revenue agreed in the contract, variation in contract work, claim and incentive payment.

2. Which of the following costs shall from part of contract costs of long-term construction contract?

a. Construction overheads including costs such as the preparation and processing of construction personnel payroll.

b. Research and development costs for which reimbursement is not specified in the contract

c. Selling costs such as broker's commission

d. General administration costs for which reimbursement is not specified in the contract

3. The percentage of completion of a construction is based on all of the following, except

a. Progress payments and advances received from customers

b. Completion of physical proportion of the contract work

c. Survey of work performed

d. The proportion that contract costs incurred for work performed to date bear to the estimated total contract costs

4. Which statement is true when the outcome of construction contract cannot be estimated reliably?

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

b. Contract costs shall be recognized as an expense in the period when incurred.

c. All of these statements are true.

d. Revenue shall be recognized only to the extent of contract costs incurred that is probable will be recoverable

5. In accounting for a long-term construction contract using the percentage of completion method, the progress billings on contracts account is a

a. Contra noncurrent asset account

b. Revenue account

c. Noncurrent liability account

d. Contra current asset account

6. Which of the following projects undertaken by an entity should be accounted for as a construction contract?

a. An office block being constructed as an investment property

b. A large boat being constructed for a third party under a specifically negotiated contract

c. an item of plant and machinery being constructed to be sold as inventory

d. A warehouse being constructed for the entity's own use

7. All of the following could be valid reasons why the expected revenue from a fixed price construction contract should be increased from the original contract price, except

a. The contractor has agreed variations to the contract with the client.

b. The costs in contract have increased and the contract includes cost escalation clause.

c. The contractor would receive an incentive payment if work continues ahead of schedule and it is probable that specified performance standards are met or exceeded.

d. The contractor has incurred additional costs due to errors made by the employees.

8. Which of the following accounting changes shall be treated retrospectively instead prospectively by the long-term construction contractor?

a. Change in the estimated costs to complete the contract

b. Change in the estimate of the outcome of the contract

c. Change in the construction revenue

d. Change from percentage of completion to cost recovery method or vice versa

Problem 1:

The ETHAN Construction company was the lowest bidder on a specialized equipment contract. The contract bid was P13,125,000 with an estimated cost to complete the project of P7,800,000. The contract period was 35 months beginning January 1, 2017. The company uses cost to cost method to estimated profits. A record of construction activities for the years 2017 to 2019 follows:

2017 2018 2019

Actual cost incurred to date P6,562,500 10,968,750 116,250,000

Estimated cost to complete 4,375,000 1,218,750 -

Progress billings 3,000,000 12,000,000 13,125,000

Cash receipts during the year 5,625,000 3,750,000 3,750,000

Using percentage-of-completion method, compute for the following:

1. How much is the realized gross profit in 2017, 2018 and 2019?

2. How much is the Revenue earned in 2018?

3. How much is the CIP net in 2018?

4. How much is the CIP net in 2019?

Using zero-profit method (cost recovery), compute for the following:

5. How much is the realized gross profit in 2017, 2018 and 2019?

6. How much is the Revenue earned in 2018?

7. How much is the CIP net in 2018?

8. How much is the CIP net in 2019?

Problem 2:

ETON CONSTRUCTION COMPANY is recognizing income from long term construction contracts. In 2013, ETON entered into a fixed-price contract to construct a fly-over connecting Luzon and Mindanao for P65,000,000. Estimated costs and contract costs incurred up to 2016 were as follows:

Year Costs incurred Estimated cost at completion Progress Billings

2013 P15,000,000 P60,000,000 P15,000,000

2014 6,700,000 62,000,000 6,000,000

2015 24,500,000 66,000,000 25,000,000

2016 16,800,000 63,000,000 19,000,000

Using percentage-of-completion method, compute for the following:

1. How much is the realized gross or (loss) profit in 2015 and 2016?

2. How much is the Revenue earned in 2015 under percentage of completion based on gross profit?

3. How much is the Revenue earned in 2015 under percentage of completion based on Contract Price (Revenue)?

4. How much is the CIP net in 2016?

5. How much is the actual cost of construction in 2015 for income statement presentation purposes?

Problem 3

On July 1, 2017, Dinar obtained a contract to construct a building. The building was estimated to be built at a total cost of P15,000,000 and is scheduled for completion on October 2019. The contract contains a penalty clause to the effect that the other party was to deduct P35,000 from the contract price for each week of delay. On the other hand, if the contractor was able to finish the building earlier than agreed, it will be rewarded an amount equal to P50,000 for every month of early completion. Furthermore, cost escalation clause was included in the contract. In 2018, the estimated costs of particular construction material amounting to P520,000 were bought for P780,000. The increase in the contract price related to this cost escalation was approved by the client. Completion was delayed for 4 weeks. The records show:

2017 2018 2019

Costs incurred P1,750,000 6,440,000 1,085,000

Estimated cost to complete 7,000,000 1,810,000 --

Progress billings 1,400,000 15,225,000 4,200,000

1. What is the Original Contract Price 2017?

2. What is the Original Contract Price 2018?

3. What is the CIP net as of 2018?

Problem 4

CABUGERO DEVELOPMENT COMPANY., started work on a construction contract in 2018. The contract price is P10,000,000. However, if the cumulative inflation reaches or exceeds 25%, the contract price shall be adjusted upward by 10%. Cost escalations on the contract are probable as to recovery. Additional information on the contract is shown below:

2018 2019

Costs incurred to date 2,400,000 4,500,000

Estimated cost at completion 6,000,000 6,000,000

Cumulative inflation rate 18% 27%

1. Compute for the percentage of completion during the year 2018.

2. Compute for the percentage of completion during the year 2019.

3. What is the contract price in 2018?

4. What is the contract price in 2019?

5. What is the realized gross profit in 2018?

6. What is the realized gross profit in 2019?