CONSTRUCTION CONTRACTS

PROBLEM 1
Binay Construction Co. has constructed to build the Market City Hall Building. The construction is
scheduled to begin on January 1, 2020, and the estimated time of completion is July 1, 2023. The
building cost is estimated to be P50 million and this will be billed at P55 million. The following relates to
the construction period:
2020 2021 2022 2023
Cost of date P 15,000,000 P 25,000,000 P 35,000,000 P 50,000,000
Estimated cost to complete 35,000,000 25,000,000 15,000,000 -
Progress Billings to date 7,000,000 20,000,000 35,000,000 55,000,000
Cash collected to date 7,000,000 18,000,000 30,000,000 55,000,000

1. Compute for the revenue, costs and realized gross profit

2. Prepare the entries for these transactions.

PROBLEM 2
RONALD Company was recently awarded a P14 million contract to construct a shopping mall for SM, Inc.
RONALD estimates it will take 3 years and 6 months to complete the contract. The company uses cost-
to-cost method to assume profits.

The following information details the actual and estimated costs for the year 2020-2023:

Year Actual Costs Estimated Costs to Complete

2020 6,500,000 6,800,000
2021 3,300,000 3,900,000
2022 2,400,000 1,900,000
2023 1,700,000 -0-

1. Compute for the revenue, costs and realized gross profit at each year
2. Prepare the entries for these transactions.

PROBLEM 3
METHZ Company is a contractor for the construction of large office buildings. At the beginning of 2023,
one building is in progress. The following described the status of the building at the beginning of the
year:

Contract price P 6,300,000

Cost incurred to January 1, 2023 ( including
worth of materials stored at the site
to be used in 2015 to complete the
project) 1,425,000
Estimated costs to complete, January 1, 2023 4,075,000

During 2023, the following data were obtained with respect to the same building:

Costs incurred to date 3,040,000

 Cost to complete, December 31, 2023 1,960,000

1. Realized gross profit(loss) to be reported for the year 2023 using the percentage of completion
and zero-profit.

PROBLEM 4.
NOYNOY Construction Company is a contractor for the construction of large office buildings. At the
beginning of 2023, three buildings were in progress. The following date relates to three buildings at the
beginning of the year:

Contract Price Cost incurred Estimated Cost to Complete

Building 1 4,000,000 2,070,000 1,380,000
Building 2 9,000,000 6,318,000 1,782,000
Building 3 13,150,000 3,000,000 9,000,000

During 2023, the following costs were incurred:

Cost incurred Estimated cost to complete(December 31, 2023)
1. Revenue, cost and gross profit in 2023 using percentage of completion.
2. Gross profit using zero profit method.

PROBLEM 5
On May 1, 2020, Applications Corporation obtained a contract to construct a building. The contract price
is 5,250,000 and completed on May 2022. The contract includes a stipulation that 75,000 will be
deducted from the contract price for every week of delay in the turnover of the asset. The completion
was delayed for four weeks. In 2021, there was an increase in the contract price amounting to 150,000
due to increase in the prices of labor and materials. Pertinent information is presented below.

2020 2021 2022

Cost incurred 750,000 1,875,000 1,275,000
Total estimated cost 3,000,000 3,500,000 3,900,000
Progress Billings 650,000 3,337,500 1,112,500
Cash collections 300,000 4,000,000 800,000
Operating expenses 275,000 398,000 342,000

As of December 31, 2020:

1. How much is the estimated cost to complete the project?
2. What is the percentage of completion?
3. What is the balance of accounts receivable?
4. How much is the excess of construction in progress over progress billings or progress
billings over construction in progress? (current asset or current liability)

As of December 31, 2021:

1. How much is the revised contract price?
2. How much is the net income for the year?
3. How much is the excess of construction in progress over progress billings or progress
billings over construction in progress? (current asset or current liability)

As of December 31,2022:
 1. What is the final contract price of the project?
2. How much is the gross profit to be recognized in the statement of comprehensive income?

PROBLEM 6
Cole construction has landed a contract to construct a 50-storey condominium in Makati. The Company
expects to incur 15,000,000 of construction cost and earn 4,500,000 from the contract. Cole uses the
percentage of completion, output measure in accounting for its construction revenue.

2020 2021 2022

Cost incurred 6,850,000 7,000,000 4,800,000
Estimated cost to complete 10,150,000 6,000,000 -
Engineer’s estimate of completion 26% 78% 100%
Progress billings 8,000,000 5,250,000 6,250,000

1. How much is the excess of construction in progress over progress billings or progress billings
over construction in progress as of December 31,2020? (current asset or current liability)
2. What is the gross profit (loss) to be reported in the statement of comprehensive income for
the year 2021?
3. How much is the excess of construction in progress over progress billings or progress billings
over construction in progress as of December 31, 2021? (current asset or current liability)
4. What is the gross profit (loss) to be reported in the statement of comprehensive income for
the year 2022?

PROBLEM 7
On January 2, 2020, Star Construction enters into a contract a 15-storey building for 40,000,000. During
the construction period many change orders are made to the original contract. Both the customer and
the contractor accepted all of the changes. The following schedule summarizes the change orders in
2020:

Cost incurred in Estimated cost to Contract price

2020 complete
Basic contract 8,000,000 28,000,000 40,000,000
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

1. How much is the gross profit to be recognized for the year 2020 under the percentage of
completion method?

PROBLEM 8
A construction company has landed a contract for the construction of an office building. At the
beginning of 2020, one project is in progress. The following data describes the status of the building at
the beginning of the year:

Contract price 6,300,000

Cost incurred to 1/1/20 (including 50,000 worth of materials
stored at the site to be used in 2021 to complete the project) 1,425,000
 Estimated costs to complete, 1/1/20 4,075,000

During 2020, the following data were obtained with respect to the same buildings:

Cost incurred to date 3,040,000

Cost to complete, 12/31/20 1,960,000

What is the realized gross profit (loss) to be reported for the year 2020 using the percentage of
completion?