Onerous Contract

In a competitive bidding process, Chang Corporation, a subcontractor, successfully secured a contract with Singh Company, a main contractor, on March 9, 20X1 to provide engineering works to support Singh in an infrastructure project. The contract fee was P7,200,000. In 20X2, Chang estimated that the contract will be unprofitable. Chang had to evaluate its options. To abandon the project would result in a penalty of P5,000,000. Chang completed the project on schedule in 20X3.

Costs incurred, estimated costs to complete is at year-end, billings and cash collections for the life of the contract are shown below:

20x1 Construction costs incurred during the year 3,200,000 Estimated costs to complete as of year-end 2,670,000 Billings made during the year 1,800,000 Cash collections during the year 1,500,000 2032 2,000,000 3,200,000 2,500,000 2,200,000 20x3 2,100,000 2,900,000 2,000,000