TEST BANK – LONG TERM CONSTRUCTION CONTRACTS

1. Pirma Company is a contractor for the construction of large office buildings. At the beginning of 2013, one building is in progress. The
following data described the status of the building at the beginning of the year.
Contract Price P6,300,000
Costs incurred to January 1, 2013 (Including P50,000 worth of materials stored at the site to be used 1,425,000
in 2014 to complete the project)
Estimated costs to complete, January 1, 2013 4,075,000

During 2013, the following data were obtained with respect to the same building:

Costs incurred to date P3,040,000

Cost to complete, December 31, 2013 1,960,000

What is the realized gross profit (loss) to be reported for the year 2013 using the percentage of completion?
a. P(300,000) c. P580,000
b. P(500,000) d. P577,400

2. Jasmine Corporation began construction work in 2013 for a project with a contract price of P8,000,000. Jasmine Corporation uses the
percentage of completion method. The financial statements for 2013 relating to the contract shows the following:
Accounts Receivable P500,000
Construction in Progress P1,600,000
Progress billings to date P1,500,000
Gross profit earned in 2013 P200,000

Compute for the following for the year 2013:

Cash Collections Cost Incurred to date
a. P1,000,000 P1,400,000
b. P7,500,000 P1,400,000
c. P1,000,000 P1,500,000
d. P1,400,000 P1,600,000

3. Villa Builders is in the business of constructing apartment buildings. Two buildings were in progress at the beginning of 2013. The
status of these buildings at the beginning of the year were as follows:
Apartment A Apartment B
Contract Price P1,620,000 P2,520,000
Cost incurred to 1/1/2013 600,000 1,560,000
Estimated costs to complete 840,000 690,000

During 2013, the following costs were incurred:

Apartment A (estimated costs to complete as of 12/31/2013, P240,000) P600,000
Apartment B (Job completed) 750,000

How much is the realized gross profit in 2013, if Villa uses the:
Percentage of Completion Zero Profit Method
a. P97,800 P187,200
b. P97,800 0
c. P210,000 P210,000
d. P97,800 P210,000

4. On May 1, 2011, Nueva Builders Company obtained a contract to build a coliseum. The coliseum was to built at a total cost of
P5,000,000 and is scheduled for completion by May 1, 2013. The contract contains a penalty clause to the effect that the other party
was to deduct P10,000 from the P6,000,000 contract for each week of delay. Completion was delayed five weeks. Below are data
pertaining to the construction period:
2011 2012 2013
Costs incurred to date P500,000 P2,340,000 P2,650,000
Estimated costs to complete 2,000,000 260,000 0
Cash collected 400,000 4,350,000 2,975,000

Using the percentage of completion method, what is the realized gross profit (loss) for the year ended December 31, 2013?
a. P325,000 c. P(10,000)
b. P(35,000) d. P240,000
5. The Jawo Construction Company was the low bidder of an office building construction contract. The contract bid was P6,000,000 with
an estimated cost to complete the project of P5,300,000. The contract was 33 months starting January 1, 2010. The company uses the
percentage of completion, cost-to-cost method of estimating profits. A record of construction activities for the year 2010 to 2013 follows:
Year Actual Cost (Current Year) Progress Billings Cash Receipts
2010 P3,400,000 P3,200,000 P3,000,000
2011 2,550,000 2,000,000 2,000,000
2012 200,000 800,000 600,000
2013 0 0 400,000

The estimated cost to complete the contract at the end of each accounting period are:
2010 P1,600,000
2011 P150,000
2012 P0

What is the balance of the construction in Progress account (net of progress billings) at the end of each year?
2010 2011 2012
a. P880,000 P650,000 P0
b. P200,000 P750,000 P(100,000)
c. P200,000 P750,000 P0
d. P0 P0 P0

6. Yokomo Construction Company was awarded a contract to construct a new sewage system for MWSS for a price of P3,250,000. The
original estimate of the cost to complete the contract was P3,000,000. The contract provides for periodic billings. A final billing equal to
25% of the contract price is to be made upon final inspection and acceptance by the MWSS.
The construction record was as follows:

Date Cost to date Estimated cost to complete

December 31, 2011 P1,075,000 P1,612,500
December 31, 2012 2,625,000 750,000
December 31, 2013 3,425,000 -0-
What is the balance of the Construction in Progress account, net of billings in the 2012 Statement of Financial Position?
a. P875,000 current liability c. P287,500 current asset
b. P1,362,500 current asset d. P62,500 current asset

7. The Tamiya Builders was recently awarded a P2,800,000 contract to construct a shopping mall for Rustan Inc. Tamiya Builders
estimates it will take 42 months to complete the contract. The company uses the cost-to-cost method to estimate profits. The following
data are available for the year 2010 to 2013:
Year Actual Cost each year Estimated Cost to complete
2010 P1,300,000 P1,360,000
2011 660,000 780,000
2012 480,000 380,000
2013 340,000 -0-
How much is the realized gross profit (loss) in 2012?
a. P(20,000) c. P22,918
b. P(62,918) d. P(22,918)

8. The following data pertains to Havaianas Builders, Inc. which uses the percentage of completion method:
Project A Project B Project C Project D
Contract Price P2,900,000 P3,400,000 P1,700,000 P2,000,000
Cost incurred, 2012 1,680,000 1,440,000 320,000 -0-
Estimated cost to complete, 2012 1,120,000 1,760,000 960,000 -0-
Cost incurred, 2013 960,000 680,000 863,000 560,000
Estimated cost to complete, 2013 -0- 1,360,000 117,000 1,040,000

General and administrative expenses for 2012 and 2013 were P120,000 for each year.

How much is the net income for the year ended:

2012 2013
a. P135,000 P309,000
b. P135,000 P489,000
c. P195,000 P429,000
d. P369,000 P135,000
9. Joys Construction Company has used the cost-to-cost method of computing the percentage of completion to recognize revenue. The
total contract price was P10,000,000. The following data are available from 2011 to 2013:

2011 2012 2013

Realized gross profit (Loss), current year P200,000 P700,000 P (100,000)
Cost incurred each year 1,800,000 ? 4,100,000

How much is the total estimated gross profit on the project by the end of 2012?
a. P1,750,000 c. P1,500,000
b. P2,250,000 d. P1,166,667

10. Jet Construction Company began operation on January 2, 2013. During the year, the company entered into a contract with Angel
Company to construct a manufacturing facility. At that time, Jet estimated that it would take five years to complete the facility at a total
cost of P1,800,000. The total contract price for the construction of the facility if P2,500,000. During the year, the company incurred
P440,000 in construction costs related to the construction project. The estimated cost to complete the contract is P1,560,000. Angel
Company was billed and paid 30% of the contract price subject to a 10% retention.

Using the percentage of completion method, how much is the excess of Construction in Progress over Contract Billings or Contract
Billings over Construction in Progress?
a. P125,000 current liability c. P200,000 current liability
b. P125,000 current asset d. P200,000 current asset

11. Mega Construct Inc. is executing a gigantic project of contracting the tallest building in Quezon City. The project is expected to take
three years to complete. The company has signed a fixed price contract of P120,000 for the construction of this prestigious tower.

The details of the costs incurred to date in the first year are:
Site labor costs P10,000,000
Cost of construction material 30,000,000
Depreciation of special plant and equipment used in contracting to build the building 5,000,000
Marketing and selling costs to get the building in the city the right exposure 10,000,000
Total 55,000,000

Total Estimated costs to complete 55,000,000

How much profit is to be recognized in the first year of construction?

a. P9,000,000 c. P6,000,000
b. P11,000,000 d. P9,900,000

12. On January 2, 2013, a fire gutted the office building of BM Construction Company and destroyed all the files in the accountant’s desk.
The president of the company has contacted you to help reconstruct the contract information. The following data were taken from the
salvaged files:
2011 2012
Architect’s estimated cost to complete P12,450,000 P8,000,000
Cost incurred 3,700,000
Percentage of completion 60%
Income recognized to date 500,000 1,200,000

What is the percentage of completion in 2011 of this construction contract?

a. 40% c. 25%
b. 20% d. 30%

13. Joemig Construction Company uses the percentage of completion method of accounting. The company started work on two job sites
during 2012. Data relating to the two jobs are as follows:
Contract Price Actual Cost (Dec. 31, 2012) Estimated cost to complete
Contract 1 P600,000 P150,000 P150,000
Contract 2 450,000 87,500 162,500

In 2013, Contract 3 was started for a contract price of P900,000. As of December 31, 2013. The following data are given:
Actual Cost (Dec. 31, 2013) Estimated cost to complete
Contract 1 P280,000 P70,000
Contract 2 180,000 120,000
Contract 3 180,000 320,000

What is the balance of Construction in Progress account on December 31, 2013?

a. P1,074,000 c. P640,000
b. P1,314,000 d. P854,000
14. Jing Construction Company started work on three job sites during 2013. Any costs incurred are expected to be recoverable. Data
relating to the three jobs are as follows:
Site Contract Price Cost Incurred Estimated Cost to Complete Billings Collections
Bicol P875,000 P656,250 - P875,000 P875,000
Davao 1,225,000 175,000 P700,000 175,000 175,000
Aklan 437,500 175,000 175,000 262,500 175,000

What is the balance of the construction in progress account on December 31, 2013 under the following methods?
Percentage of Completion Zero Profit Method
a. P26,250 due from P87,500 due to
b. P26,250 current liability P87,500 current asset
c. P87,500 due from P26,250 due to
d. P87,500 due from P26,250 current asset

15. On January 2, 2013, JJ Construction Company of Makati City enters into a contract to construct a 5-storey building for P40,000,000.
During the construction period, many change orders are made to the original contract. All of the changes were accepted by both the
customer and the contractor. The following schedule summarizes the change orders in 2013:
Cost incurred in 2011 Estimated costs to complete Contract Price
Basic Contract P8,000,000 P28,000,000 P40,000,000
Change order #1 50,000 50,000 125,000
Change order #2 - 50,000 -
Change order #3 300,000 300,000 600,000
Change order #4 125,000 100,000

Under the percentage of completion method, what is the gross profit to be recognized on December 31, 2013 (rounded to the nearest
peso)?
a. P907,830 c. P909,063
b. P888,889 d. P970,830

16. On July 1, 2013, North Construction Corporation contracted to build an office building for SM, Inc. for a total contract price of
P2,950,000. Estimated total contract costs is P2,600,000. Costs incurred to date related to the project are as follows:
Cost of direct materials used P200,000
Cost of direct labor, including supervision of P50,000 150,000
Cost of indirect materials used 55,000
Cost incurred in obtaining the contract previously written off 70,000
Depreciation of equipment used on the project 120,000
Payroll of design and technical department allocated to the contract 80,000
Insurance costs (2/3 for other project) 180,000
Costs of contracted research and development 105,000
Depreciation of idle equipment not used on a particular contract 60,000
Selling costs 45,000
General and Administrative expenses specifically included under the term of the contract 30,000
Borrowing cost incurred during the construction period 130,000
Advances made to subcontractors 100,000

Using the percentage of completion method, what is the realized gross profit to be recognized for 2013?
a. P125,195 c. P111,055
b. P104, 335 d. P134, 610

For items 17-18. East Construction Company has two construction projects which commenced in 2013. Data for the two projects are as
follows:

Project 1 Project 2
Contract Price P420,000 P150,000
Cost incurred during 2013 120,000 140,000
Estimated costs to complete 60,000 35,000
Progress billings during 2013 125,000 145,000
Collections during 2013 120,000 140,000
Expenses 10,000 5,000

17. Using the percentage of completion method, what is the net income (loss) for the year ended December 31, 2013?
a. P120,000 c. P125,000
b. P150,000 d. P135,000

18. Under the zero profit method, what is the net income (loss) for the year ended December 31, 2013?
a. P(30,000) c. P(25,000)
b. P30,000 d. P25,000
 For items 19-20. On January 15, 2011, South Builders, Inc. won a bidding to build an athletic stadium. The project was to be built at a
total cost of P5,500,000 an was scheduled for completion by September 1, 2013. One clause of the contract stated that South Builders,
Inc. was to deduct P15,000 from the P6,600,000 bid price for each week that completion was delayed. Completion was delayed six
weeks.

Data for the three-year construction period follows:

2011 2012 2013
Costs incurred each year P1,782,000 P2,068,000 P1,650,000
Estimated costs to complete 3,618,000 1,650,000 -
Contract billings each year 1,200,000 1,900,000 ?
Cash Collections each year 1,000,000 1,800,000 3,710,000
Operating Expenses 100,000 90,000 70,000

19. What is the net income for the year 2012, using the percentage of completion method?
a. P284,000 c. P248,000
b. P374,000 d. P743,000

20. Using the percentage of completion method, what is the balance of the Construction in Progress account net of billings at December
31, 2012?
a. P1,520,000 c. P1,520,500
b. P1,784,500 d. P1,250,000

--------------------------------------------------------------------ANSWER KEY----------------------------------------------------------------------------

1. D

2. A

3. D
4. D

5. A

6. D
7. B

8. A
9. C

10. D

11. A

12. A

13. A
14. A

15. A

16. A
17. A

18. A (Project 2 only)

19. A

20. A