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POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

ADVANCED FINANCIAL ACCOUNTING AND REPORTING PART 1


LONG TERM CONSTRUCTION CONTRACTS (PAS 11)
INSTRUCTION: Use the space provided for each item for the exact answers. Erasures on the final answers are considered
incorrect. Any form of cheating is equivalent to 5 on the final rating. Only worksheet (for valid solutions), black pen (no
friction pen), calculator, and the test paper will be allowed on the chair of the examinee.
August 29, 2015

1.

On June 1, 2015, Nancy Construction Corp. was contracted to build a world class parking building for Binay Inc. Estimated
total contract costs is P180,000,000. It incurs the following costs relating to the contract during the first year:
Cost of materials used
P25,000,000.00
Site labor cost
20,000,000.00
Cost of indirect materials used
5,000,000.00
Half year depreciation of plant and equipment used on the contract
4,285,714.29
Payroll of design and technical department allocated to the contract
2,500,585.55
Insurance costs allocable to the contract
1,499,414.45
Depreciation of idle equipment that is not used on a particular contract
500,000.00
Marketing costs for selling apartments when they are ready
10,000,000.00
Agreed administrative costs per contract to be reimbursed by the customer
4,555,500.00
Borrowing cost incurred during the construction period
1,444,500.00
Using cost-to-cost method of PAS 11 in determining the stage of completion, the percentage of completion of this
contract at year end is: _________________

2.

New Company has started construction work on a project with a fixed contract price of P4,500,000. New expects to incur
total costs of P3,375,000 on this project. During the first year of the project, the following transactions occurred:
Incurred cost of materials, labor and overhead used in the work, P2,700,000.
Paid costs of materials purchased but set aside for use in a future date for this project, P225,000. These
materials do not have any alternative use and cannot be sold to other parties.
Paid and incurred rectification work not expected to be recovered, P292,500.
Incurred general and administrative costs that are not reimbursable, P112,500.
Incurred selling costs, P67,500.
Incidental income from the sale of certain materials, P45,000. These specific materials were sold since it
was considered surplus from the early phase of the construction.
The engineers determined that the original estimate of costs did not include any expected warranty costs
of P225,000.
Applying principles of PAS 11 Construction Contracts, determine the profit for the first year. _____________________

3.

TWD agreed to construct a hut on January 1, 2014 for a fixed price of P4.5 million. Initial estimate for the engineer with
regards to cost of the hut was P4 million and projects that the project completion date will be on December 31, 2016.
However, due to unforeseen events during 2014, costs of raw materials increased. Because of the increase, the initial
estimate made by the engineer is understated by P25,000. Total costs incurred for the first year was P1,046,500. During
2015, the customer wanted a brand new solar panel to be installed on the roof of the hut. The engineer estimated that
this would entail additional costs of P75,000. The customer agreed that he will pay an extra P100,000 for the variation in
the contract. Total costs incurred at the end of the second year amounted to P2,037,500. This amount is inclusive of
P50,000 paid for the standard materials to be used in construction the following year.
How much should be reported as Construction in Progress as of December 31, 215? _________________

4.

Candy Company entered into a contract to build a small bridge for Guagua. The contract price for the bridge was
P7,500,000 and Candy estimated a total costs of P6,900,000 in 2014. The company incurred P2,300,000 of costs during
2014. By the end of 2015 it was apparent that Candy had underestimated the real costs. The estimated total cost of
project skyrocketed to P7,800,000. Construction costs incurred in 2015 totaled P4,000,000. The project was completed in
2016 at a final costs of P7,800,000. No progress billings were made under the contract and no cash was collected by the
end of 2016. The amount of gross profit (loss) that must be recognized in 2015 must be ___________________

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5.

Party Construction Co. enters into a contract on January 2, 2015 to construct a 20-storey office building for P400 million
(M). During the construction period, many change orders are made to the original contract. The following schedule
summarizes these changes made in 2015:
Cost incurred in
2015

Estimated cost
to complete

Contract Price

Basic Contract
Change order # 1
Change order # 2
Change order # 3

80,000,000
500,000
1,000,000

280,000,000
500,000
500,000
1,000,000

Change order # 4

1,250,000

400,000,000
1,250,000
Still to be negotiated at
least cost
1,000,000

Determine the gross profit to be recognized during the year under the cost to cost percentage of completion method.
(Round off percentage of completion rate at one decimal percentage) _____________________
6.

Egay Construction Corporation contracted with the province of Pampanga to construct a bridge at a contract price of
P16,000,000. Egay Corporation expects to earn P1,520,000 on the contract. The percentage of completion method is to be
used and the completion stage is to be determined by estimates made by the engineer. The following schedule
summarizes the activities of the contract for years 2014-2016.

Cost
Costs
Year Incurred
2014 P4,600,000
2015 4,500,000
2016 5,250,000

Engineers
Estimate to
Complete
P9,640,000
5,100,000
-0-

Billings
Completion
31%
58%
100%

Collection
on Contract
on Billings
P5,000,000
P4,500,000*
5,000,000
5,400,000*
5,000,000
6,100,000

*A 10% retainer accounts for the difference between billings and collections.
Under percentage of completion method, using the engineers estimate as the measure of completion to be applied to
revenues and costs, how much is the gross profit earned each year? _________________
7.

Ambet Construction has consistently used the percentage-of-completion method. On January 10, 2014, Ambet began work
on P3,000,000 construction contract. At the inception date, the estimated cost of construction was P2,250,000. The
following date relate to the progress of the contract:
Income recognized at December 31, 2014 P300,000
Costs incurred January 10, 2012 through December 31, 2015 P1,800,000
Estimated cost to complete December 31, 2015 P600,000.
In its statement of comprehensive income for the year ended Dec. 31, 2015, what amount of gross profit should Ambet
report? _____________________

8.

Rowel Construction, Inc. has consistently used the percentage-of-completion method of recognizing income. During 2015,
Rowel started to work on a P3,000,000 fixed price construction contract. The accounting records disclosed the following
data for the year ended December 31, 2015:
Cost incurred P930,000
Estimated cost to complete P2,170,000
Progress billings P1,100,000
Collections P700,000.
How much loss should Rowel have recognized in 2015? _________________________

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9.

In 2014, Mekeni Abe Builders Inc., successfully bided on a fixed-price contract for a factory building at a price of
P26,000,000. Mekeni Abe uses the percentage-of-completion method and the following data are obtained on the project.

December 31, 2015


December 31, 2014

Percentage of
Completion
60%
20%

Estimated total
cost of completion
P20,800,000
19,500,000

Income recognized
to-date
P3,120,000
1,300,000

What is the contract cost incurred in 2013 assuming that costs incurred are used to measure the extent of progress
toward project completion? ________________________
10. Company Z engages in long-term construction contracts and uses the percentage of completion method to recognize gross
profits. The company started contract 1 in 2012, contract 2 in 2013, and contract 3 in 2014. The total gross profit
(estimated and actual). And the percentage complete for each contract at the end of 2013 through 2015 are:
Contract 1*
Contract 2
Contract 3
Gross profit
P800,000
P350,000
P600,000
% complete at the end of:
2013
75%
50%
2014
100%
70%
35%
2015
100%
90%
*30% was complete at the end of 2012.
The gross profit from construction for 2013, 2014 and 2015, respectively must be: __________________
11. On January 1, 2012, Builder Associates entered into a P1,000,000 long-term fixed-price contract to construct a factory
building for M Company, Builder accounts for this contract under the percentage of completion and estimated costs at
completion at the end of each quarter for 2012 were as follows:
Estimated Percentages
Estimated costs
Quarter
of-completion
at completion
1
10%
P750,000
2*
10%
P750,000
3
25%
P960,000
4*
25%
P960,000
*No work performed in the 2nd and 4th quarters.
What amounts should be reported by Builder as Income on Construction Contact in its quarterly income statements
based on the above information? _________________________________
12. The following costs of AYAHLA Land relates directly to a specific contract for 2014:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)
(n)
(o)

site labor costs, including site supervision P212,500


costs of materials used in construction P425,000
depreciation of equipment used on the construction P340,000
costs of moving equipments and materials to and from the contract site P50,000
costs of hiring equipment for the construction P67,250
costs of design and technical assistance related to the contract P130,000
the estimated costs of rectification and guarantee work, including expected warranty costs P150,000
incidental income from the disposal of fully depreciated equipment used in the construction P12,000
depreciation of equipment not used in the construction but is in the construction site P60,000
general administration costs for which reimbursement is not specified in the contract P50,000
selling costs P25,000
research and development costs for which reimbursement is not specified in the contract P310,000
depreciation of idle equipment that can be used in any construction contract P140,000
cost of securing the contract for the period until the final completion of the contract P25,250
site supervision P28,000

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It is the managements policy is to include interest as part of the cost of construction just being completed. Additional
information follows:
Total construction expenditures:
January 2, 2014
P1,000,000
May 1, 2014
200,000
November 1, 2014
500,000
March 1, 2015
700,000
September 1, 2015
400,000
December 31, 2015
500,000
P3,300,000
Outstanding company debt:
Mortgage related directly to project; interest rate, 12%; term, 5 years from the beginning of construction P1M
General Liability
Bonds issued just prior to construction; interest rate, 10% for 10 years P500,000
Bonds issued just prior to construction; interest rate, 8%, mature in 5 years P1,000,000
Determine the total cost of construction for 2014. ___________________________
13. Calvin Corporation was contracted by Ms. Taylor to construct 35 condominium units. The estimated total cost of
construction was P49M. Calvin bills its clients at 120% of total costs estimated to complete the project. Details regarding
the contract are given below:

2015
2016
2017

Units finished
10
18
7

Cost incurred to date


14,721,875
36,286,250
55,125,000

Estimated cost at completion


58,887,500
55,825,000
?

What is the realized gross profit during 2016 using the output measures? _____________________
14. The Lucky One International Inc. recently acquired the Gangster Builders Company. Gangster has incomplete accounting
records. On one particular project, only the information below is given. Because the information is incomplete, you are
asked the following questions assuming the percentage of completion method is used and an output measures is used to
estimate the percentage completed.

Cost incurred during the year


Estimated total cost to complete
Recognized revenue
Gross profit on contract
Contract price

2013
2,850,000.00
6,150,000.00
2,500,000.00
?
7,500,000.00

2014
3,150,000.00
10,000,000.00
3,125,000.00
?

2015
?
?
(175,000.00)

How much is the gross profit (loss) recognized on 2013? ___________________


15. Under PAS 11 Construction Contracts, the primary issue in accounting for construction contracts is
a. the allocation of contract revenue to the accounting periods in which construction work is performed.
b. the allocation of contract costs to the accounting periods in which construction work is performed.
c. the determination of percentage of completion.
d. A and B.
e. All of the choices.
16. PAS 11 Construction Contracts provides that any expected loss on the construction contract is
a. recognized as an expense immediately.
b. recognized as an expense immediately as an adjustment to the revenue already recognized.
c. recognized as an expense immediately adjunct to the costs of construction already recognized.
d. deferred and amortized over the remaining construction period.

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17. Which of the following appears on the statement of financial position of a contractor who is applying PAS 11
Construction Contracts?
a. Construction in progress as current asset.
b. Progress billings as current liability.
c. Gross amount of due from (due to) customers for contract work.
d. Any of the choices.
18. Which of the following standards shall apply in identifying
(e.g., borrowing costs specifically financed for the construction)?
I. PAS 11 Construction Contracts
II. PAS 23 Borrowing Costs
a. I only
b. II only
c. I or II

and

recognizing

costs

of

construction

d. I and II

19. A construction company is in the middle of a two-year construction contract when it receives a letter from the customer
extending the contract by a year & requiring the construction company to increase its output in proportion of the number
of years of the contract to the previous contract period. This is allowed in recognizing additional revenue according to PAS
11 Construction Contracts if
a. Negotiations have reached an advanced stage and it is probable that the customer will accept the claim.
b. The contract is sufficiently advanced and it is probable that the specified performance standards will be exceeded or
met.
c. It is probable that the customer will approve the variation and the amount of revenue arising from the variation, and
the amount of revenue can reliably measured.
d. It is probable that the customer will approve the variation and the amount of revenue arising from the variation,
whether the amount of revenue can be reliably measured or not.
e. A and C
20. Which of the following statements is/are TRUE?
I. The most popular input measure under percentage of completion accounting is the cost to cost method.
II. As construction contract estimates change, retroactive adjustments are required.
III. Estimates of architects and engineers of work completed are acceptable input measure under percentage
of completion method
IV. Estimated losses on long-term contracts are recognized ratably over the contract term under the
percentage of completion method
a. I and III only

Construction Contracts

b. I, II and IV only

c. I, III and IV only

d. I only

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