ADVANCED ACCOUNTING 1 – Chapter 7: Construction Contracts

James B. Cantorne
Problem 1. T/F
1. True.
2. True.
3. False.
There are other methods for which a revenue may be recognized in LTCC under PFRS 15
aside from percentage of completion, such as zero profit method.
4. True.
5. True.
6. False.
It is a performance obligation that is satisfied over time because the customer controls the
asset created by the satisfaction of performance obligation.
7. False.
4/8 x 10 Million Price – 4 Million Cost is equal to 1 Million Gross Profit
8. True
9. False.
An entity recognizes a contract liability when the consideration is received first before
the satisfaction of performance obligation of the contractor. The statement is pertaining to
contract asset.
10. True
Problem 2. MCQs – Theory
1. D. At contract inception, the collectability of the consideration is probable of collection.
2. D. The customer’s decision of not purchasing a good or service affects the other
promised goods or services in the contract.
3. D. Either a or b
4. C. The entity’s performance creates an asset with an alternative use to the entity and the
entity has an enforceable right to payment for performance completed to date.
5. B. When the construction is completed and the promised goods and services are
transferred to the customer.
6. C. By multiplying the percentage of completion to the contract price and deducting
revenues already recognized in the prior periods.
7. D. No, No
8. A. Not third year, Third year
9. C. Appraisal of results achieved
10. C. Fixed amount of 900,000 and variable of 100,000
Problem 3. Exercises
1. Electrified Construction Co. (POC)
Gross profits, revenues, and cost of construction in 20x1 to 20x3:
 20x1 20x2 20x3
Total contract price 20,000,000 20,000,000 20,000,000
Cost incurred to date 8,160,000 15,480,000 17,400,000
Estimated cost to complete 8,840,000 1,720,000 -
Estimated total cost 17,000,000 17,200,000 17,400,000
Expected gross profit 3,000,000 2,800,000 2,600,000
Multiply by POC 48% 90% 100%
Gross profit earned to date 1,440,000 2,520,000 2,600,000
Gross profit in prior period (1,440,000) (2,520,000)
Gross profit for the period 1,440,000 1,080,000 80,000

20x1 20x2 20x3

Total contract price 20,000,000 20,000,000 20,000,000
Multiply by POC 48% 90% 100%
Revenue to date 9,600,000 18,000,000 20,000,000
Revenue in prior period (9,600,000) (18,000,000)
Revenue for the period 9,600,000 8,400,000 2,000,000
Cost of construction (8,160,000) (7,320,000) (1,920,000)
Gross profit 1,440,000 1,080,000 80,000

Alternative solution (applicable in input method)

Revenue = Computed Gross Profit + Cost of Construction
Revenue = (20x1) 1,440,000 + 8,160,000, (20x2) 1,080,000 + 7,320,000, (20x3) 80,000 +
2,520,000; (20x1) 9,600,000, (20x2) 8,400,000, (20x3) 2,000,000
Journal entries
PAS 11 PFRS 15
20x1
(Incurrence of cost)
Construction in progress 8.16M Contract cost 8.16M
Cash 8.16M Cash 8.16M
(Billing)
Accounts receivable 10M Receivable 10M
Progress billing 10M Contract liability 10M
(Collection)
Cash 9.5M Cash 9.5M
Accounts Receivable 9.5M Accounts Receivable 9.5M
(Revenue recognition)
Cost of construction 8.16M Contract liability 9.6M
Construction in progress 1.44M Revenue 9.6M
Revenue 9.6M
Cost of construction 8.16M
 Contract cost 8.16M
20x2
Cost of construction 7.32M Contract cost 7.32M
Cash 7.32M Cash 7.32M
Accounts receivable 7M Receivable 7M
Progress billing 7M Contract liability 7M
Cash 6.65M Cash 6.65M
Accounts receivable 6.65M Receivable 6.65M
Cost of construction 7.32M Contract liability 8.4M
Construction in progress 1.08M Revenue 8.4M
Revenue 8.4M
Cost of construction 7.32M
Contract cost 7.32M
20x3
Construction in progress 1.92M Contract cost 1.92M
Cash 1.92M Cash 1.92M
Accounts receivable 3M Receivable 3M
Progress billing 3M Contract liability 3M
Cash 3.85M Cash 3.85M
Account receivable 3.85M Receivable 3.85M
Cost of construction 1.92M Contract liability 2M
Construction in progress .08M Revenue 2M
Revenue 2M
Progress billing 20M Cost of construction 1.92M
Construction in progress 20M Contract cost 1.92M

Financial statements
PAS 11 PFRS 15
Construction in progress Contract cost
8,160,000 8,160,000 8,160,000
1,440,000 -
9,600,000 7,320,000 7,320,000
7,320,000 -
1,080,000 1,920,000 1,920,000
18,000,000 -
1,920,000 Contract liability
80,000 9,600,000 10,000,000
20,000,000 20,000,000 400,000
- 8,400,000 7,000,000
Progress billings 1,000,000 3,000,000
10,000,000 2,000,000
10,000,000 -
7,000,000 Receivable
 17,000,000 10,000,000 9,500,000
3,000,000 500,000
20,000,000 20,000,000 7,000,0000 6,650,000
- 850,000
Accounts receivable 3,000,000 3,850,000
10,000,000 9,500,000 -
500,000
7,000,0000 6,650,000
850,000
3,000,000 3,850,000
-

PAS 11
Electrified Construction Co
Statement of Financial Position
Current assets 20x1 20x2 20x3
Accounts receivable 500,000 850,000
Construction in progress 18,000,000
Progress billings (17,000,000)
Gross amount due from cust. 1,000,000
Total 500,000 1,850,000

Current liabilities
Construction in progress 9,600,000
Progress billings (10,000,000)
Gross amount due to cust. 400,000
Total 400,000
Statement of Profit or Loss
Revenue 9,600,000 8,400,000 2,000,000
Cost of construction (8,160,000) (7,320,000) (1,920,000)
Gross profit 1,440,000 1,080,000 80,000

PFRS 15
Electrified Construction Co
Statement of Financial Position
Current assets 20x1 20x2 20x3
Receivable 500,000 850,000
Contract asset 1,000,000
Total 500,000 1,850,000

Current liabilities
 Contract liability 400,000
Total 400,000
Statement of Profit or Loss
Revenue 9,600,000 8,400,000 2,000,000
Cost of construction (8,160,000) (7,320,000) (1,920,000)
Gross profit 1,440,000 1,080,000 80,000

2. Electrified Construction Co. (Zero Profit Method)

Gross profit, revenues, and cost of construction:
20x1 20x2 20x3
Revenue 8,160,000 7,320,000 4,520,000
Contract cost incurred (8,160,000) (7,320,000) (1,920,000)
Gross profit for the period 0 0 2,600,000

PAS 11 PFRS 15
20x1
Construction in progress 8.16M Contract cost 8.16M
Cash 8.16M Cash 8.16M
Accounts receivable 10M Receivable 10M
Progress billing 10M Contract liability 10M
Cash 9.5M Cash 9.5M
Accounts Receivable 9.5M Accounts Receivable 9.5M
Cost of construction 8.16M Contract liability 8.16M
Revenue 8.16M Revenue 8.16M

Cost of construction 8.16M

Contract cost 8.16M
20x2
Cost of construction 7.32M Contract cost 7.32M
Cash 7.32M Cash 7.32M
Accounts receivable 7M Receivable 7M
Progress billing 7M Contract liability 7M
Cash 6.65M Cash 6.65M
Accounts receivable 6.65M Receivable 6.65M
Cost of construction 7.32M Contract liability 7.32M
Revenue 7.32M Revenue 7.32M

Cost of construction 7.32M

Contract cost 7.32M
20x3
Construction in progress 1.92M Contract cost 1.92M
Cash 1.92M Cash 1.92M
 Accounts receivable 3M Receivable 3M
Progress billing 3M Contract liability 3M
Cash 3.85M Cash 3.85M
Account receivable 3.85M Receivable 3.85M
Cost of construction 1.92M Contract liability 4.52M
Construction in progress 2.6M Revenue 4.52M
Revenue 4.52M
Progress billing 20M Cost of construction 1.92M
Construction in progress 20M Contract cost 1.92M

Financial statements
PAS 11 PFRS 15
Construction in progress Contract cost
8,160,000 8,160,000 8,160,000
8,160,000 -
7,320,000 7,320,000 7,320,000
15,480,000 -
1,920,000 1,920,000 1,920,000
2,600,000 -
20,000,000 20,000,000 Contract liability
- 8,160,000 10,000,000
Progress billings 1,840,000
10,000,000 7,320,000 7,000,000
10,000,000 1,520,000
7,000,000 4,520,000 3,000,000
17,000,000 -
3,000,000 Receivable
20,000,000 20,000,000 10,000,000 9,500,000
- 500,000
Accounts receivable 7,000,0000 6,650,000
10,000,000 9,500,000 850,000
500,000 3,000,000 3,850,000
7,000,0000 6,650,000 -
850,000
3,000,000 3,850,000
-

PAS 11
Electrified Construction Co
Statement of Financial Position
Current assets 20x1 20x2 20x3
Accounts receivable 500,000 850,000
Construction in progress
Progress billings
Gross amount due from cust.
Total 500,000 850,000

Current liabilities
Construction in progress 8,160,000 15,480,000
Progress billings (10,000,000) (17,000,000)
Gross amount due to cust. 1,840,000 1,520,000
Total 1,840,000 1,520,000
Statement of Profit or Loss
Revenue 8,160,000 7,320,000 4,520,000
Cost of construction (8,160,000) (7,320,000) (1,920,000)
Gross profit 0 0 2,600,000

PFRS 15
Electrified Construction Co
Statement of Financial Position
Current assets 20x1 20x2 20x3
Receivable 500,000 850,000

Total 500,000 850,000

Current liabilities
Contract liability 1,840,000 1,520,000
Total 1,840,000 1,520,000
Statement of Profit or Loss
Revenue 8,160,000 7,320,000 4,520,000
Cost of construction (8,160,000) (7,320,000) (1,920,000)
Gross profit 0 0 2,600,000

Problem 4. MCQs – Computational

1. A. 1,500,000;150,000
(1,350 / (1,350 + 2,700,000)) x 4,500,000 = 1,500,000
1,500,000 – 1,350,000 = 150,000
2. D. 2,500,000;2,400,000
(3,900/7,800) x 9,000,000 = 4,500,000
(6,300/8,100) x 9,000,000 = 7,000,000
7,000,000 – 4,500,000 = 2,500,000
6,300,000 – 3,900,000 = 2,400,000
 3. B. 920,000; 6,000,000; 5,080,000
(3,920/(3,920 + 5,880)) x 12,000,000 = 4,800,000
((5,080 + 3,920)/(3,920 + 5,080 + 1,000)) x 12,000,000 = 10,800,000
Revenue for the period = 10,800,000 – 4,800,000 = 6,000,000
Gross profit = 6,000,000 – 5,080,000 = 920,000
4. C. 0, 5,080,000; 5,080,000
Since there are still 1,000,000 in estimated cost to complete, it necessarily means that the
performance obligation is not yet finished as a whole. Consequently, under zero profit
method, no gross profit is recognized because revenue is equal to cost.
5. A. 0;0;0
Revenue and cost of construction is recognized at a point in time, the point in time is
when performance obligation is wholly satisfied.
6. B. 450,000
20x1 20x2 20x3

Total contract price 6,000,000 6,000,000 6,000,000

Cost incurred to date 1,000,000 3,450,000 4,500,000
Estimated total cost 4,000,000 4,600,000 4,500,000
Expected gross profit 2,000,000 1,400,000 1,500,000
Multiply by POC 25% 75% 100%
Gross profit earned to date 500,000 1,050,000 1,500,000
Gross profit in prior period (500,000) (1,050,000)
Gross profit for the period 500,000 550,000 450,000
7. D. 1,100,000; 1,100,000
20x1 20x2 20x3
Total contract price 9,000,000 9,000,000 9,000,000
Cost incurred to date 3,120,000 6,930,000 7,740,000
Estimated cost to complete 4,680,000 770,000 -
Estimated total cost 7,800,000 7,700,000 7,740,000
Expected gross profit 1,200,000 1,300,000 1,260,000
Multiply by POC 40% 90% 100%
Gross profit earned to date 480,000 1,170,000 1,260,000
Gross profit in prior period (480,000) (1.170,000)
Gross profit for the period 480,000 690,000 90,000

20x1 20x2 20x3

Total contract price 9,000,000 9,000,000 9,000,000
Multiply by POC 40% 90% 100%
Revenue to date 3,600,000 8,100,000 9,000,000
Revenue in prior period (3,600,000) (8,100,000)
Revenue for the period 3,600,000 4,500,000 900,000
Cost of construction (3,120,000) (3,810,000) (810,000)
 Gross profit 480,000 690,000 90,000

Gross amount due = 4,500,000 – (4,000,000 – 3,600,000) – 3,000,000 = 1,100,000 (Contract

asset)
8. C. 10,000
20x1 20x2 20x3
Total contract price 5,000,000 5,000,000 5,000,000
Cost incurred to date 1,425,000 4,040,000 5,080,000
Estimated cost to complete 3,325,000 1,010,00 -
Estimated total cost 4,750,000 5,050,000 5,080,000
Expected gross profit 250,000 (50,000) (80,000)
Multiply by POC 30% 100% 100%
Gross profit earned to date 75,000 (50,000) (80,000)
Gross profit in prior period (75,000) 50,000
Gross profit for the period 75,000 (125,000) (30,000)

20x1 20x2 20x3

Total contract price 5,000,000 5,000,000 5,000,000
Multiply by POC 30% 80% 100%
Revenue to date 1,500,000 4,000,000 5,000,000
Revenue in prior period (1,500,000) (4,000,000)
Revenue for the period 1,500,000 2,500,000 1,000,000
Cost of construction (1,425,000) (2,615,000) (1,040,000)
Gross profit 75,000 (115,000) (40,000)
Loss on onerous contract - (10,000) 10,000
Profit 75,000 (125,000) (30,000)
9. A. (30,000)
10. C. 6,600,000
20 – (1.4 + 0.4 – 200) – 3.6 – 8.2 = 6,600,000
11. B. 6,800,000
1.4+6.6+ 4 (6.6+3.6)
( 20 )=
( 6.6+3.6 )+ x
x=6.8
20x1 20x2 20x3
Total contract price 20,000,000 20,000,000 20,000,000
Cost incurred to date 3,600,000 10,200,000 18,000,000
Estimated cost to complete 14,400,000 6,800,000 -
Estimated total cost 18,000,000 17,000,000 18,000,000
Expected gross profit 2,000,000 3,000,000 2,000,000
Multiply by POC 20% 60% 100%
Gross profit earned to date 400,000 1,800,000 2,000,000
Gross profit in prior period (400,000) (1,800,000)
Gross profit for the period 400,000 1,400,000 (200,000)

20x1 20x2 20x3

Total contract price 20,000,000 20,000,000 20,000,000
Multiply by POC 20% 60% 100%
Revenue to date 4,000,000 12,000,000 20,000,000
Revenue in prior period (4,000,000) (12,000,000)
Revenue for the period 4,000,000 8,000,000 8,000,000
Cost of construction (3,600,000) (6,600,000) (8,200,000)
Gross profit 400,000 1,400,000 (200,000)

12. D. 1,500,000
20x1 20x2 20x3
Cost incurred to date 10,500,000 24,800,000 30,800,000
Estimated cost to complete 19,500,000 6,200,000
Total contract cost 30,000,000 31,000,000 30,800,000
Multiply by 100% + Variable r 120% 125% 125%
Estimated contract price 36,000,000 38,750,000 38,500,000
Cost incurred to date 10,500,000 24,800,000 30,800,000
Estimated cost to complete 19,500,000 6,200,000
Estimated contract cost 30,000,000 31,000,000 30,800,000
Expected gross profit 6,000,000 7,750,000 7,700,000
Multiply by POC 35% 80% 100%
Gross profit earned to date 2,100,000 6,200,000 7,700,000
Gross profit in prior period (2,100,000) (6,200,000)
Gross profit for the year 2,100,000 4,100,000 1,500,000

13. A. 2,320,000; 1,740,000

20x1 20x2
Total contract price 4,000,000 4,000,000
Estimated cost to complete (3,000,000) (3,000,000)
Expected profit 1,000,000 1,000,000
Multiply by POC 32% 90%
Profit to date 320,000 900,000
Profit in prior period (320,000)
Profit for the year 320,000 580,000

20x1 20x2
Total contract price 4,000,000 4,000,000
Multiply by POC 32% 90%
 Revenue to date 1,280,000 3,600,000
Revenue in prior period (1,280,000)
Revenue for the period 1,280,000 2,320,000
Cost of construction (960,000) (1,740,000)
Gross profit 320,000 580,000

14. D. 16,500,000; 2,060,000

20x1 20x2
Total contract price 25,000,000 26,250,000
Cost incurred to date 3,960,000 18,400,000
Estimated total cost 22,000,000 23,000,000
Expected gross profit 3,000,000 3,250,000
Multiply by POC 18% 80%
Gross profit earned to date 540,000 2,600,000
Gross profit in prior period (540,000)
Gross profit for the period 540,000 2,060,000

20x1 20x2
Total contract price 25,000,000 26,250,000
Multiply by POC 18% 80%
Revenue to date 4,500,000 21,000,000
Revenue in prior period (4,500,000)
Revenue for the period 4,500,000 16,500,000
Cost of construction (3,960,000) (14,440,000)
Gross profit 540,000 2,060,000

15. A. 125,000; 605,000; 300,000

20x1 20x2
CIP, ending balances 305,000 910,000
Cost incurred to date (262,500) (742,500)
Profit to date 42,500 167,500
Profit in prior period (42,500)
Profit for the period 42,500 125,000

20x1 Revenue = 42,500 + 262,500 = 305,000

20x2 Revenue = 125,000 + 480,000 = 605,000
20x2 collection = 1,050,000 – 750,000 = 300,000