Long Term Construction

Contracts

DE LEON/ DE LEON/ DE LEON

 segmenting construction
contracts
When a contract covers the construction of a
number of assets, the contract for the construction
of each asset shall be considered a separate
contract when:
1. Separate proposals have been made for each
asset;
2.Each asset has been subject to separate
negotiation and both contractor and customer were
able to accept or reject that part of the contract
relating to each asset; and
3.The costs and revenues of each asset are
separately identifiable.
Combining construction
contracts
A group of contracts, each with a single or even
with different customers, shall be treated as a
single contract because:
1.The group of contracts is negotiated as a single
package.
2.The contracts are so closely interrelated that
they are effectively part of one project with one
overall profit margin; and
3.The contracts are performed either concurrently
or in a continuous process.
Contract costs
Costs that relate directly to a specific contract
include:
site labour costs, including site supervision
costs of materials used in construction
depreciation of plant and equipment used on the
contract
costs of moving plant, equipment and materials to
and from the contract site
costs of hiring plant and equipment
costs of design and technical assistance that is
directly related to the contract
Contract costs
Costs that may be attributable to contract activity in general
and can be allocated to specific contracts include:
insurance
costs of design and technical assistance that are not
directly related to a specific contract
construction overheads.

Costs that are specifically chargeable to the customer under

the terms of the contract may include some general
administration costs and development costs for which
reimbursement is specified in the terms of the contract.
 LONG-TERM CONSTRUCTION CONTRACTS
SUGGESTED SOLUTIONS – PROBLEMS & MULTIPLE CHOICE

Exercise 1.1.a. Accounting for a profitable project.

DTD Entries 2016 2017 2018

CIP 1,512,000
Cash 1,512,000
AR 2,240,000
PB or CB 2,240,000

Cash 1,960,000
AR 1,960,000
 LONG-TERM CONSTRUCTION CONTRACTS
SUGGESTED SOLUTIONS – PROBLEMS & MULTIPLE CHOICE

Year-end Supporting Computations

2016 2017 2018

Contract Price 5,600,000
Less Costs: ACTD 1,512,000
ACTC 3,528,000
ESTC 5,040,000
Estimated Gross Profit 560,000
Percentage of Completion 30%

% of Comp= ACTD/ESTC
= 1,512,000/ 5,040,000
= 30%
 LONG-TERM CONSTRUCTION CONTRACTS
SUGGESTED SOLUTIONS – PROBLEMS & MULTIPLE CHOICE

TO-DATE R. P. Y. R. T. Y,

Revenue (5,600,000 x 30%) 1,680,000 - 1,680,000

Cost (5,040,000 x 30%) 1,512,000 - 1,512,000
Gross profit (560,000 x 30%) 168,000 - 168,000
 LONG-TERM CONSTRUCTION CONTRACTS
SUGGESTED SOLUTIONS – PROBLEMS & MULTIPLE CHOICE

Exercise 1.1.a. Accounting for a profitable project.

2016 2017 2018

CIP 1,512,000 2,520,000
Cash 1,512,000 2,520,000
AR 2,240,000 2,240,000
PB or CB 2,240,000 2,240,000
Cash 1,960,000 2,240,000
AR 1,960,000 2,240,000

Const. Cost 1,512,000

CIP 168,000
Const Revenue 1,680,000
 LONG-TERM CONSTRUCTION CONTRACTS
SUGGESTED SOLUTIONS – PROBLEMS & MULTIPLE CHOICE

Year-end Supporting Computations

2016 2017 2018

Contract Price 5,600,000 5,600,000
Less Costs: ACTD 1,512,000 4,032,000
ACTC 3,528,000 448,000
ESTC 5,040,000 4,480,000
Estimated Gross Profit 560,000 1,120,000
Percentage of Completion 30% 90%
% of Comp= ACTD/ESTC
= 4,032,000/ 4,480,000
= 90%
 LONG-TERM CONSTRUCTION CONTRACTS
SUGGESTED SOLUTIONS – PROBLEMS & MULTIPLE CHOICE

TO-DATE RPY RTY

Revenue (5,600,000 x 30%) 1,680,000 - 1,680,000

Cost (5,040,000 x 30%) 1,512,000 - 1,512,000
Gross profit (560,000 x 30%) 168,000 - 168,000

Revenue (5,600,000 x 90%) 5,040,000 1,680,000 3,360,000

Cost (4,480,000 x 90%) 4,032,000 1,512,000 2,520,000
Gross Profit (1,120,000 x 90%) 1,008,000 168,000 840,000
 LONG-TERM CONSTRUCTION CONTRACTS
SUGGESTED SOLUTIONS – PROBLEMS & MULTIPLE CHOICE

Exercise 1.1.a. Accounting for a profitable project.

DTD Entries 2016 2017 2018

CIP 1,512,000 2,520,000 504,000
Cash 1,512,000 2,520,000 504,000
AR 2,240,000 2,240,000 1,120,000
PB or CB 2,240,000 2,240,000 1,120,000
Cash 1,960,000 2,240,000 1,400,000
AR 1,960,000 2,240,000 1,400,000
YEA: PERCENTAGE OF COMPLETION METHOD
Const. Cost 1,512,000 2,520,000
CIP 168,000 840,000
Const Revenue 1,680,000 3,360,000
 LONG-TERM CONSTRUCTION CONTRACTS
SUGGESTED SOLUTIONS – PROBLEMS & MULTIPLE CHOICE

Year-end Supporting Computations

2016 2017 2018

Contract Price 5,600,000 5,600,000 5,600,000
Less Costs: ACTD 1,512,000 4,032,000 4,536,000
ACTC 3,528,000 448,000 -
ESTC 5,040,000 4,480,000 4,536,000
Estimated Gross Profit 560,000 1,120,000 1,064,000
Percentage of Completion 30% 90% 100%
 LONG-TERM CONSTRUCTION CONTRACTS
SUGGESTED SOLUTIONS – PROBLEMS & MULTIPLE CHOICE

TO-DATE RPY RTY

Revenue (5,600,000 x 30%) 1,680,000 - 1,680,000

Cost (5,040,000 x 30%) 1,512,000 - 1,512,000
Gross profit (560,000 x 30%) 168,000 - 168,000

Revenue (5,600,000 x 90%) 5,040,000 1,680,000 3,360,000

Cost (4,480,000 x 90%) 4,032,000 1,512,000 2,520,000
Gross Profit (1,120,000 x 90%) 1,008,000 168,000 840,000

Revenue (5,600,000 x 100%) 5,600,000 5,040,000 560,000

Cost (4,536,000 x 100%) 4,536,000 4,032,000 504,000
Gross Profit(1,064,000 x100%)1,064,000 1,008,000 56,000
 LONG-TERM CONSTRUCTION CONTRACTS
SUGGESTED SOLUTIONS – PROBLEMS & MULTIPLE CHOICE

Exercise1.1.a. Accounting for a profitable project.

DTD Entries 2016 2017 2018
CIP 1,512,000 2,520,000 504,000
Cash 1,512,000 2,520,000 504,000
AR 2,240,000 2,240,000 1,120,000
PB or CB 2,240,000 2,240,000 1,120,000
Cash 1,960,000 2,240,000 1,400,000
AR 1.960,000 2,240,000 1,400,000
YEA: PERCENTAGE OF COMPLETION METHOD
Const. Cost 1,512,000 2,520,000 504,000
CIP 168,000 840,000 56,000
Const Revenue 1,680,000 3,360,000 560,000
PB 5,600,000
CIP 5,600,000
 LONG-TERM CONSTRUCTION CONTRACTS
SUGGESTED SOLUTIONS – PROBLEMS & MULTIPLE CHOICE

Alternative Computations
2016 2017 2018
Contract Price 5,600,000 5,600,000 5,600,000
Multiply by %-to-date 30% 90% 100%
Revenue-to-date 1,680,000 5,040,000 5,600,000
Deduct cost-to-date 1,512,000 4,032,000 4,536,000
Profit –to-date 168,000 1,008,000 1,064,000
 LONG-TERM CONSTRUCTION CONTRACTS
SUGGESTED SOLUTIONS – PROBLEMS & MULTIPLE CHOICE

1.2.a. CIP year-end balances, % of Completion Method

2016 2017 2018

Beginning balance - P1,680,000 P5,040,000
Actual cost P1,512,000 2,520,000 504,000
Recognized profit 168,000 840,000 56,000
Ending balance P 1,680,000 P 5,040,000 P5,600,000
 LONG-TERM CONSTRUCTION CONTRACTS
SUGGESTED SOLUTIONS – PROBLEMS & MULTIPLE CHOICE

Exercise 1.1.b. Zero-Profit-Method

YEA 2016 2017 2018

C. Cost 1,512,000 2,520,000 504,000

CIP - - 1,064,000
C. Revenue 1,512,000 2,520,000 1.568,000

PB 5,600,000
CIP 5,600,000
 LONG-TERM CONSTRUCTION CONTRACTS
SUGGESTED SOLUTIONS – PROBLEMS & MULTIPLE CHOICE

1.2.b. CIP year-end balances, Zero-profit-method

2016 2017 2018

Beginning balance - 1,512,000 4,032,000

Actual cost this period 1,512,000 2,520,000 504,000
Recognized profit this period - - 1,064,000
Ending balances 1,512,000 4,032,000 5,600,000
 LONG-TERM CONSTRUCTION CONTRACTS
SUGGESTED SOLUTIONS – PROBLEMS & MULTIPLE CHOICE

Exercise 2 -Year-end Supporting Computations

2016 2017 2018
Contract Price 5,529,600
Less Costs: ACTD
ACTC 1,843,200
ESTC 3,072,000
Estimated Gross Profit 4,915,200
Percentage of Completion 614,400
37.5%
% of Comp= ACTD/ESTC
= 1,843,200/ 4,915,200
= 37.5%
 LONG-TERM CONSTRUCTION CONTRACTS
SUGGESTED SOLUTIONS – PROBLEMS & MULTIPLE CHOICE

TO-DATE RPY RTY

Revenue (5,529,600 x 37.5%) 2,073,600 - 2,073,600
Cost (4,915,200 x 37.5%) 1,843,200
GP (614,400 x 37.5%) 1,843,200 --
230,400 230,400
 LONG-TERM CONSTRUCTION CONTRACTS
SUGGESTED SOLUTIONS – PROBLEMS & MULTIPLE CHOICE

Exercise 2.1.a. 2016 2017 2018

Construction Cost 1,843,200

CIP 230,400
Const. Revenue 2,073,600
 LONG-TERM CONSTRUCTION CONTRACTS
SUGGESTED SOLUTIONS – PROBLEMS & MULTIPLE CHOICE

Year-end Supporting Computations

2016 2017 2018
Contract Price 5,529,600 5,529,600
Less Costs: ACTD 3,446,784
ACTC 1,843,200 2,297,856
ESTC 3,072,000 5,744,640
Estimated Gross Profit 4,915,200 ( 215,040)
Percentage of Completion 614,400 60%
37.5%
% of Comp= ACTD/ESTC
= 3,446,784/ 5,744,640
= 60%
 LONG-TERM CONSTRUCTION CONTRACTS
SUGGESTED SOLUTIONS – PROBLEMS & MULTIPLE CHOICE

TO-DATE RPY RTY

Revenue (5,529,600 x 37.5%) 2,073,600 2,073,600
1,843,200
Cost (4,915,200 x 37.5%) 1,843,200 230,400
Est GP (614,400 x 37.5%) 230,400

Revenue (5,529,600 X 60%) 2,073,600 1,244,160

3,317,760 1,689,600
Cost (to balance)) 3,532,800 1,843,200 ( 445,440)
Gross loss (full amount) ( 215,040) 230,400
 LONG-TERM CONSTRUCTION CONTRACTS
SUGGESTED SOLUTIONS – PROBLEMS & MULTIPLE CHOICE

2016 2017 2018

C. Cost 1,843,200 1,689,600
CIP 445,440
C. Revenue 230,400 1,244,160
2,073,600
 LONG-TERM CONSTRUCTION CONTRACTS
SUGGESTED SOLUTIONS – PROBLEMS & MULTIPLE CHOICE

Year-end Supporting Computations

2016 2017 2018
Contract Price 5,529,600 5,529,600 5,529,600
Less Costs: ACTD 3,446,784 5,821,440
ACTC 1,843,200 2,297,856 -
ESTC 3,072,000 5,744,640 5,821,440
Estimated Gross Profit 4,915,200 ( 215,040) ( 291,840)
Percentage of Completion 614,400 60% 100%
37.5%
 LONG-TERM CONSTRUCTION CONTRACTS
SUGGESTED SOLUTIONS – PROBLEMS & MULTIPLE CHOICE

TO-DATE RPY RTY

Revenues (5,529,600 x 37.5%) 2,073,600 - 2,073,600
- 1,843,200
Cost (4,915,200 x 37.5%) 1,843,200 - 230,400
GP (614,400 x 37.5%) 230,400

Revenue (5,529,600 x 60%)) 2,073,600 1,244,160

3,317,760 1,689,600
Cost (to balance) 3,532,800 1,843,200 ( 445,440)
Gross loss (full amount) ( 215,040) 230,400
Revenue (5,529,600 x 100%) 5,529,600 3,317,760 2,211,840
Cost (5,821,440 x 100%) 5,821,440 2,288,640
Gross loss (291,840 x 100%) ( 291,840) 3,532,800 ( 76,800)
( 215,040)
 LONG-TERM CONSTRUCTION CONTRACTS
SUGGESTED SOLUTIONS – PROBLEMS & MULTIPLE CHOICE

Exercise 2.1.a 2016 2017 2018

C. cost 1,843,200 1,689,600 2,288,640
CIP 445,440 76,800
C. Revenue 230,400 1,244,160 2,211,840
2,073,600
 LONG-TERM CONSTRUCTION CONTRACTS
SUGGESTED SOLUTIONS – PROBLEMS & MULTIPLE CHOICE

Exercise 2.1.a. 2016 2017 2018

C. cost 1,843,200 1,689,600 2,288,640
CIP 445,440 76,800
C. Revenue 230,400 1,244,160 2,211,840
2,073,600
PB 5,529,600
CIP 5,529,600
2.2 Zero-Profit-Method

2016 2017 2018

C. Cost 1,843,200 1,603,584 2,374,656
CIP - 215,040 76,800
C. Revenue 1,843,200 1,388,544 2,297,856

PB 5,529,600
CIP 5,529,600
PROBLEM 3
COMPUTATIONS OF ESTIMATED GROSS PROFITS AND
PERCENTAGES OF COMPLETION
PROJECT 1 PROJECT 2 PROJECT 3
Contract price P 560,000 P 670,000 P 520,000
Cost to-date P 450,000 P 126,000 P 330,000
Addl cost to comp 150,000 504,000 -
Total estimated cost P600,000 P 630,000 P 330,000

Estimated GP/(GL) P(40,000) P 40,000 P 190,000

% OF COMPLETION 75% 20% 100%
COMPUTATION OF PROPORTIONATE REVENUES,
COSTS, AND GROSS PROFITS/(GROSS LOSS) TO BE
REPORTED FOR 2018
GP / (GL)
Proj 1: Revenue(P560,000 X 75%) P 420,000
Cost ( P420,000 + P (40,000)
Proj 2: RevenueP40,000)
(P670,000 X P460,000
134,000
Cost 20%)
(P630,000 X 126,000 8,000
Proj 3: Revenue(P520,000
20%) X P520,000
Cost (P330,000
100%) X 100%) 330,000 190,000
Total Gross Profit
(P1,074,000 - P 916,000) P158,000
PARTIAL INCOME
STATEMENT
Revenues from construction fees P 1,074,000
Costs of construction 916,000
Gross profit P 158,000
 PROJ1 PROJ 2 PROJ 3
CIP:

Cost 450,000 126,000

GP/ GL (40,000) 8,000

134,000 -
410,000
Current Asset/Due from Customer Current Liab/Due to Customer

PB: 360,000 220,000 -

OR 670,000 x 20%= 134,000

 PARTIAL BALANCE SHEET
Current asset
Accounts receivable (P1,080,000 - P990,000) P 90,000
Inventories
Const in progress (P450,000 – P40,000) P410,000
Progress billings 360,000 50,000

Current liabilities
Progress billings P220,000
Construction in progress ( 670,000 X 20%)* 134,000 86,000
Exercise 4
4.1
Amount billed
Accounts receivable, end P 147,600
Cash collected 51,600
P 96,000
4.2
Profit recognized to date P 46,800
6.5%
Divide by P720,000
Total estimated initial profit
4.3
CIP, 12/31/16 P 156,000
Less profit recognized-to-date 46,800
Actual cost in 2018 P 109,200

4.4
Actual cost to date P 109,200
Divide by 6.5%
Total estimated cost P1,680,000
DTD:

CIP 109,200
Cash 109,200

AR 147,600
PB 147,600

Cash 96,000
AR 96,000

YEA
Const Cost 109,200
CIP 46,800
Const Revenue 156,000
Exercise 5
Contract Price P192.0 million
Less Costs: Actual to-date P124.8 million
Addl cost to complete 28.8 153.6
Estimated gross profit P 38.4 million
% Completed (140.8m/192.0m)* 73.33%
To-date R. P. Y. R. T. Y.
Sales revenue (P192.0m x 73.33%)P 140.8m P96.0m P 44.8m
Cost (P153.6m x 73.33%) 112.64 72 40.64
Gross profit (P38.4m x 73.33%) P 28.16m P 24m P 4.16m

CIP (P124.8m + P28.16m) P152.96m

PB 128
Due from customers P 24.96m
MULTIPLE CHOICE

1. C
2017 2016
Contract Price P10,000,000 P10,000,000
Est. Total Cost 8,000,000 7,500,000
Gross Profit P 2,000,000 2,500,000

GP * % of Comp = RGP GP * % of Comp = RGP

GP = RGP / % of Comp % of Comp = RGP / GP
= 1,200,000/ .60 = 500,000/ 2.5M
= 2,000,000 = 20%
2. D
Project A Project B
Contract price P 945,000 P675,000
Less: ACTD P540,000 P 630,000
ACTC 270,000 810,000 157,500 787,500
Est. GP/(GL) P135,000 P(112,500)
Multiply by ( 540/ 810) 2/3 100%

% of completion P 90,000 + P(112,500) = P( 22,500)

Zero-profit-method - + P(112,500) = (112,500)
 3. D

2017 (P427,000 – P367,500) P 59,500

2018 (P1,274,000 – P427,000 – P672,000) P175,000

2017 2018
Cost: 367,500 CIP 2017
427,000
427,000 1,274,000
Cost: 672,000
GP: 59,500 CIP 2018
847,000
GP: 175,000
4. D
CIP (5,468,750 x 22%) P1,203,125
Less Progress Billings (P5,468,750 x 30%) 1,640,625
Due to Customers (Current liability) P ( 437,500)

% of Comp= 962,500/ (962,500+ 3,412,500)

= 22%

CHECK:
CP 5,468,750
Cost
CTD 962,500
3,412,500 4,375,000
GP 1,093,750
Multiply by 22%
RGP 240,625
CTD 962,500
CIP 1,203,125
5.
CIP:
Cebu P444,480 – 5,800 P 438,680
Davao (P262,500 x 50%) 131,250
Total P 569,930
Deduct PB (P400,000 + P157,500) 557,500
Due from customers (Current asset) P 12,430

CEBU: DAVAO:
CP 735,000 CP 262,500
COST: CTD 444,480 COST: CTD 105,000
ACTC 296,320 ACTC 105,000
ETC 740,800 ETC 210,000
GL (5,800) GP 52,500
Multiply by 50%
ADD CTD 444,480 RGP 26,250
CIP 438,680 ADD CTD 105,000
CIP 131,250
5. A
ZERO PROFIT METHOD

CIP:
Cebu P 438,680
Davao 105,000
Total P 543,680
Deduct PB 557,500
Due to customers (current liability) P( 13,820)
6. B % of Compl M Zero Profit M
Manila P131,250 P131,250
Cebu (5,800) ( 5,800)
Davao 26,250 -
Totals P151,700 P125,450

Manila:
CP 525,000
Cost:
ACTD 393,750
ACTC - 393,750
GP 131,250
Multiply by 100%
RGP 131,250
7. B
Contr 2: P 560,000 X 20% P112,000
3: P 200,000 X 50% 100,000
Total P212,000

CHECK:: CHECK::
CP 560,000 CP 200,000
Cost: CTD 80,000 Cost: CTD 80,000
ACTC 320,000 ACTC 80,000
ETC 400,000 ETC 160,000
GP 160,000 GP 40,000
% of Comp = 80,000/ ( 80,000 + 320,000)
= 20%
% of Comp = 80,000/ ( 80,000 + 80,000)
= 50%
8. B
2017 (P8,000,000 x 64%) – P 3,993,600 P 1,126,400
2016 (P8,000,000 x 20%) - P 1,024,000 576,000
Profit recognized in 2017 P 550,400

% of Comp = 3,993,600/ ( 3,993,600 + 2,246,400)

= 64%

% of Comp = 1,024,000 / ( 1,024,000 + 4,096,000)

= 20%
2017: 2016:
CP 8,000,000 CP 8,000,000
COST: CTD 3,993,600 COST: CTD 1,024,000
ACTC 2,246,400 ACTC 4,096,000
ETC 6,240,000 ETC 5,120,000
GP 1,760,000 GP 2,880,000
Multiply by 64% Multiply by 20%
GPTD 1,126,400 GPTD 576,000

RGP TO DATE: 1,126,400

R.P.Y. 576,000
R.T.Y. 550,400