Construction Contracts: Problem 1: True or False

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Chapter 7
Construction Contracts
PROBLEM 1: TRUE OR FALSE

1. FALSE – Step 2 is the identification of the
performance obligations in the contract
2. TRUE
3. FALSE – over time
4. TRUE
5. FALSE
6. TRUE
 4M costs incurred ÷ 8M estimated total contract
costs = 50%
 10M contract price – 8M estimated total contract
costs = 2M expected total gross profit x 50%
completion = 1M gross profit
7. FALSE
8. FALSE
9. TRUE
10. FALSE
PROBLEM 2: MULTIPLE CHOICE – THEORY

1. D – choice (d) is incorrect. Total contract costs may
need to be estimated only if the entity chooses to use
the ‘cost-to-cost’ method to measure its progress on a
contract. This may not be necessary if the entity uses
other methods, for example, an output method.
2. D
3. A
4. B
5. C
6. D
7. B
8. A
9. C
10. C
PROBLEM 3: EXERCISES
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1. Solutions:
Requirement (a):
 Gross profits
20x1 20x2 20x3
20,000, 20,000, 20,000,00
Total contract price 000 000 0
8,160,0 15,480, 17,400,00
(1)
(a) Costs incurred to date 00 000 0
Estimated costs to 8,840,0 1,720,0
complete 00 00 -
Estimated total contract 17,000, 17,200, 17,400,00
(b) costs 000 000 0
3,000,0 2,800,0
Expected gross profit 00 00 2,600,000
Multiply by: % completion
(a) ÷ (b) 48% 90% 100%
1,440,0 2,520,0
Gross profit earned to date 00 00 2,600,000
Less: Gross profit in prior (1,440,0 (2,520,00
yrs. - 00) 0)
1,440, 1,080,0
Gross profit for the year 000 00 80,000
(1)
20x1: 8,160,000
20x2: (8,160,000 + 7,320,000) = 15,480,000
20x3: (8,160,000 + 7,320,000 + 1,920,000) = 17,400,000
 Revenues
20x1 20x2 20x3
20,000,0 20,000,0 20,000,0
Multiply by: % of completion 48% 90% 100%
9,600,0 18,000, 20,000,
Revenue to date 00 000 000
Less: Revenue recognized in (9,600,0 (18,000,0
prior yrs. - 00) 00)
9,600,0 8,400,0 2,000,0
Revenue for the year 00 00 00
(8,160,0 (7,320,0 (1,920,0
Cost of construction 00) 00) 00)
1,440,0 1,080,0
Requirement (b): Journal entries
 20x1
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Traditional accounting PFRS 15

(a) Incurrence of cost:
Construction in progress 8.16M Contract costs 8.16M
Cash (or other accounts) Cash (or other accounts)
8.16M 8.16M
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(b) Billing:
Accounts receivable 10M Receivable 10M
Progress billings Contract liability
10M 10M
(c) Collection:
Cash 9.5M Cash 9.5M
Accounts receivable Receivable
9.5M 9.5M
(d) Revenue recognition:
Cost of construction 8.16M Contract liability 9.6M
Construction in progress 1.44M Revenue
Revenue 9.6M
9.6M
Cost of construction 8.16M
Contract costs
8.16M
 20x2
7.32M 7.32M
7M 7M
Cash 6.65M Cash 6.65M
6.65M 6.65M
Revenue 8.4M
8.4M
Contract costs
7.32M
 20x3
1.92M 1.92M
3M 3M
3.85M 3.85M
Cost of construction Contract liability 2M
1.92M Revenue
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Construction in progress 80K 2M

Revenue
2M
Progress billing Cost of construction 1.92M
20M Contract costs
Construction in progress 1.92M
20M
to eliminate the accounts
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Requirement (c): Financial statements
 The debit balance in the contract liability account on 12/31/x2 is

presented as asset.
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2. Solutions:
Requirement (a):
20x1 20x2 20x3
8,160,00 7,320,00 4,520,0
Revenue (a) 0 0 00
Contract costs incurred (8,160,0 (7,320,0 (1,920,00
per yr. 00) 00) 0)
Gross profit for the 2,600,
year - - 000
(a)
Revenues in 20x1 and 20x2 are equal to the costs incurred
during those years. Revenue in 20x3 is equal to the contract price
less the revenues recognized in 20x1 and 20x2 (20M – 8.16M –
7.32M = 4.52M).

 20x1
8.16M 8.16M
(b) Billing:
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10M 10M
(c) Collection:
Cash 9.5M Cash 9.5M
9.5M 9.5M
Revenue Revenue
8.16M 8.16M
Contract costs
8.16M
 20x2
7.32M 7.32M
7M 7M
6.65M 6.65M
Revenue Revenue
7.32M 7.32M
Contract costs
7.32M
 20x3
1.92M 1.92M
3M 3M
3.85M 3.85M
Cost of construction Contract liability 4.52M
1.92M Revenue
Construction in progress 2.6M 4.52M
Revenue
4.52M
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20M Contract costs
20M
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PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL
1. B 20M x 2/16 = 2,500,000
2. A
Solution:
20x1 20x2
Total contract price 3,000,000 3,000,000
Multiply by: % of completion 20% 60%
Contract revenue to date 600,000 1,800,000
Contract revenue in prior years - (600,000)
Contract revenue for the
600,000 1,200,000
year
Cost of construction
(450,000) (990,000)
(squeeze)
Profit (loss) for the year 150,000 210,000(a)
(a)
(360,000 -150,000) = 210,000
3. C
Solution:
20x1 20x2
9,000,0 9,000,00
Total contract price 00 0
(
a 3,900,00 6,300,00
) Costs incurred to date 0 0
(not (not
Estimated costs to complete needed) needed)
(
b Estimated total contract costs 7,800,00 8,100,0
) (given) 0 00
1,200,00
Expected profit (loss) 0 900,000
Multiply by: % of completion 77.7778
(a) ÷ (b) 50% %
Profit (loss) to date 600,000 700,000
(600,000
Profit recognized in prior years - )
100,00
Profit (loss) for the year 600,000 0
20x1 20x2
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Total contract price 9,000,000 9,000,000

Multiply by: % of completion 50% 77.7778%
Contract revenue to date 4,500,000 7,000,000
Contract revenue in prior (4,500,00
years - 0)
Contract revenue for the 2,500,0
year 4,500,000 00
Cost of construction (3,900,00 (2,400,0
(squeeze) 0) 00)
Profit (loss) for the year 600,000 100,000
4. C
Solution:
20x1 20x2
Contract revenue for the 2,400,0
year (a) 3,900,000 00
(3,900,00 (2,400,0
Cost of construction 0) 00)
Profit (loss) for the year - -
(a)
Equal to the costs incurred per year. The costs incurred in
20x2 are computed as follows: (6,300,000 - 3,900,000 =
2,400,000).
5. A – No revenue, cost of construction and gross profit

are recognized during the course of construction.
These are recognized only when the construction is
completed and legal title over the constructed
building is transferred to the customer.
6. D
Solution:
20x1 20x2 20x3
18,000, 18,000,0 18,000,0
Contract price
000 00 00
Estimated total contract 12,000, 12,300,0 12,280,0
costs 000 00 00
Expected total gross 6,000,0 5,700,00 5,720,00
profit 00 0 0
Percentage of completion
(a) 25% 68% 100%
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1,500,0 3,876,00 5,720,00

Gross profit to date
00 0 0
Gross profit in prior (1,500,0 (3,876,0
years 00) 00)
Gross profit for the 1,500,0 2,376,0 1,844,0
year 00 00 00
3,000,0 8,364,00 12,280,0

(a)
Costs incurred to date 00 0 00
costs 000 00 00
Percentage of
completion 25% 68% 100%
7. B
Solution:
 Traditional accounting
Construction in
progress
Costs incurred to date -
20x2 4,840,000
Gross profit - 20x1 (see
below) 570,000
Gross profit - 20x2 (see
below) 990,000
12/31/x2 6,400,000
20x1 20x2 20x3

8,000,0 8,000,00 8,000,00
Contract price
00 0 0
Contract costs incurred 1,830,0 4,840,00 6,000,00
to date 00 0 0
-
complete 00 0
Estimated total contract 6,100,0 6,050,00 6,000,00
costs 00 0 0
Expected total gross 1,900,0 1,950,00 2,000,00
profit 00 0 0
Percentage of completion 30% 80% 100%
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1,560,00 2,000,00
Gross profit to date 570,000
0 0
Gross profit in prior (570,000 (1,560,0
years ) 00)
Gross profit for the 570,00
year 0 990,000 440,000
Construction in progress - 12/31/x2 6,400,000
Progress billings - 12/31/x2 (4M + 3M) 7,000,000

Gross amount due to customer -
12/31/x2 600,000
 PFRS 15
Contract liability
4,000,0 Billings -
00 20x1
Revenue - 20x1 (see 2,400,00
below) 0
Revenue - 20x2 (see 4,000,00 3,000,0 Billings -
below) 0 00 20x2
600,00
0 12/31/x2
20x1 20x2 20x3

8,000,0 8,000,00 8,000,00
Contract price
00 0 0
Percentage of
30% 80% 100%
completion
2,400,0 6,400,00 8,000,00
Revenue to date
00 0 0
(2,400,0 (6,400,0
Revenue in prior years
00) 00)
2,400,0 4,000,00 1,600,00
Revenue for the year
00 0 0
8. A
Solution:
20x1 20x2 20x3
Total contract price 5,000,0 5,000,0 5,000,0
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00 00 00
1,425,0 4,040,0 5,080,0
Costs incurred to date
00 00 00
-
complete 00 00
costs 00 00 00
250,00 (50,000 (80,00
Expected total profit (loss)
0 ) 0)
Multiply by: % of
completion 30% N/A 100%
(50,000 (80,00
Profit (loss) to date 75,000 ) 0)
(75,000
Profit (loss) in prior years ) 50,000
(125,00 (30,00
Profit (loss) for the year 75,000 0) 0)
5,000,0 5,000,00 5,000,00

Total contract price
00 0 0
Percentage of completion
(a)
30% 80% 100%
1,500,0 4,000,00 5,000,00
(1,500,0 (4,000,0
Revenue in prior years 00) 00)
1,500, 2,500,0 1,000,0
1,425,0 2,615,00 1,040,00
Construction costs 00 0 0
Gross profit (loss) for the (115,00
year 75,000 0) (40,000)
(10,000
Loss provision/Reversal ) 10,000
Net profit (loss) for the (125,00
year 75,000 0) (30,000)
(a) 1,425,0 4,040,0 5,080,0

Costs incurred to date (1)
00 00 00
-
complete 00 00
costs (2) 00 00 00
Percentage of completion 30% 80% 100%
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(1) ÷ (2)
9. C – see previous solution
10. C
Solution:
Step 1: Place given information in pro-forma

computation:
20x1
(a) Costs incurred to date ?
Estimated costs to complete ?
(b) Estimated total contract costs 2,250,000
Percentage of completion (a) ÷ (b) 40%
Step 2: ‘Squeeze’ for missing information:

20x1
(a) Costs incurred to date (2,250,000 x
900,000
40%)
Estimated costs to complete ?
Step 3: ‘Squeeze’ some more:

20x1
(a) Costs incurred to date 900,000
Estimated costs to complete
1,350,000
(2,250,000 – 900,000)
11. A
Solution:
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20x1 20x2
3,000, 3,000,0
1,800,0
Costs incurred to date (a) 00
Estimated costs to complete, Dec.
31, 20x2 600,000
2,250, 2,400,
Estimated total contract costs (b) 000 000
750,00
Expected profit (loss) 0 600,000
Multiply by: % of completion (a)
÷ (b) 40% 75%
300,00
Profit (loss) to date 0 450,000
Profit recognized in prior years (300,00
(given) - 0)
300,00 150,0
Profit (loss) for the year 0 00
20x1 20x2
3,000, 3,000,0
1,200, 2,250,0
Contract revenue to date 000 00
(1,200,0
Contract revenue in prior years - 00)
1,200, 1,050,
Contract revenue for the year 000 000
(900,0 (900,00
Cost of construction (squeeze) 00) 0)
300,00 150,00
Profit (loss) for the year 0 0
12. C
Solution:
20x1 20x2 20x3
(a) 10,500,0 24,800,0 30,800,0
00 00 00
-
complete 00 0
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costs 00 00 00
Multiply by: Cost + Var. fee
(b) 115% 120% 120%
price 00 00 00
Multiply by: % of
35% 80% 100%
completion (c)
12,075,0 29,760,0 36,960,0
Revenue to date
00 00 00
Less: Revenue in prior (12,075,0 (29,760,0
-
yrs. 00) 00)
12,075,0 17,685,0 7,200,00
Revenue for the year
00 00 0
(10,500,0 (14,300,0 (6,000,00
Cost of construction
00) 00) 0)
1,575,00 3,385,00 1,200,0
Gross profit for the year
0 0 00
(a)
20x1: 10,500,000
20x2: (10,500,000 + 14,300,000) = 24,800,000
20x3: (10,500,000 + 14,300,000 + 6,000,000) = 30,800,000
(b)
The 5% additional fee is included in 20x2 when it became highly
probable that it will be received.
(c)
% of completion = Costs incurred to date ÷ Estimated total
contract costs
13. C
Solution:
20x1 20x2
4,000, 4,000,
000 000
(3,000, (3,000,
Estimated total contract costs
000) 000)
Expected gross profit on 1,000, 1,000,
completion 000 000
Gross profit to date 350,000 900,000
Gross profit in prior years (350,000)
Gross profit for the year 350,000 550,000

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20x1 20x2
4,000, 4,000,
000 000
Percentage of completion 35% 90%
Revenue to date 1,400,000 3,600,000
Revenue in prior years (1,400,000)
Revenue for the year 1,400,000 2,200,000
Construction costs (1,050,000 (1,650,00

(squeeze) ) 0)
Gross profit for the year 350,000 550,000
14. A
Solution:
20x1 20x2
1,536,00 11,528,00
0 0
Divide by: Estimated total 12,800,0 13,100,00
contract costs 00 0 (a)
(a)
(12.8M initial estimate + 300,000 additional costs from
modification) = 13,100,000
20x1 20x2
15,000, 15,750,0
000 00 (b)
Estimated total contract (12,800, (13,100,00
costs 000) 0)
2,200, 2,650,0
Expected total profit
000 00
2,332,0
Profit (loss) to date 264,000 00
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(264,0
Profit (loss) in prior years 00)
2,068,
Profit (loss) for the year 264,000 000
(b)
(15M original contract price x 105%) = 15,750,000
20x1 20x2
15,000, 15,750,
000 000
Revenue to date 1,800,000 13,860,000
Revenue in prior years (1,800,000)
12,060,00
Revenue for the year 1,800,000 0
Construction costs 1,536,000 9,992,000
Profit (loss) for the year 264,000 2,068,000
15. C
Solution:
20x1 20x2
Construction in progress, ending
balances 122,000 364,000
(297,00
(a)
Contract costs incurred to date (105,000) 0)
Profit to date 17,000 67,000
Profit in previous years - (17,000)
Profit for the year 17,000 50,000
(a)
Contract costs incurred to date in 20x2 = (105,000 + 192,000)
= 297,000.
20x1 20x2
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242,00
Revenue for the year (squeeze) 122,000 0
(192,000
(b)
Cost of construction (105,000) )
Profit for the year 17,000 50,000
(b)
Under the ‘cost-to-cost’ method of measuring progress,
the “cost of construction” for a year is equal to the contract
costs incurred during that year.
Optional reconciliation:
 CIP as of 12/31/x2 of 364,000 less CIP as of 12/31/x1 of
122,000 = 242,000 revenue in 20x2
Accounts receivable
100,0
12/31/x1 00
Billing in 20x2 (420K 320,0 120, Collection
- 100K) 00 000 (squeeze)
300,0
00 12/31/x2
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PROBLEM 5: CLASSROOM ACTIVITY
ACTIVITY 1:
Solutions:
Step 1: Identify the contract with the customer
Requirement (a): YES, the contract qualifies for

accounting under PFRS 15 because all the requirements
of “Step 1” are met (the contract is approved; the rights
of the parties and the payment terms can be identified;
the contract has commercial substance; and the
consideration is probable of collection.
Step 2: Identify the performance obligations in the

contract
Requirement (b):
The promises to transfer the lot, to provide the house
design and to construct the house are treated as a single
performance obligation because the promised goods
and services are not individually distinct. That is, the
customer:
a. cannot benefit from the goods and services
individually (Entity X does not regularly sell lots,
house designs, and construction services separately);
and
b. the goods and services are not individually separable
(each good and service is an input to a combined
output, which is the house and lot, including the
house design. These are highly interrelated – the
customer cannot purchase one without necessarily
purchasing the others).
Requirement (c):
The performance obligation is satisfied at a point in
time because it does not meet any of the criteria to be
satisfied over time.
Criteria to be satisfied over Analysis (for Entity X)

time
A performance obligation is
satisfied over time if one of the
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following criteria is met:

a. The customer Criteria (a) and (b) are not met
simultaneously receives and because Entity X retains
consumes the benefits control of the lot, the design,
provided by the entity’s and the house during the
performance as the entity construction period. This
performs. precludes the customer from
simultaneously receiving and
b. The entity’s performance consuming the benefits
creates or enhances an provided by the Entity X’s
asset that the customer performance as Entity X
controls as the asset is performs. In case of default,
created or enhanced. Entity X forfeits the properties
in its favor.
c. The entity’s performance Criterion (c) is not met because

does not create an asset of the following reasons:
with an alternative use to a. Entity X’s performance
the entity and the entity has creates an asset with an
an enforceable right to alternative use. This is
payment for performance evidenced by the fact that
completed to date. Entity X can resell forfeited
properties without much
modification because the
design is standard.
b. Entity X’s right to payment
is not directly correlated
with performance
completed to date, i.e., the
monthly payments are due
irrespective of the stage of
completion of the house.
Step 3: Determine the transaction price

Requirement (d):
The transaction price is ₱6,000,000 minus 2% penalty
for every month of delay. Accordingly, the transaction
price includes a variable consideration.
 Accounting for the variable consideration

Entity X shall estimate the amount of the expected
penalty and deduct that amount from the ₱6M contract
price but only after subjecting the estimate to the
“constraining estimates” principle of PFRS 15.
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However, since Entity X does not expect any

delays on the construction, Entity X is not required to do
the foregoing until there is a subsequent change in
circumstances.
 Significant financing
Since the installment payments are due within 1 year,
Entity X may choose not to discount the payments under
the practical expedient allowed under PFRS 15.
However, Entity X is not precluded under PFRS 15 from
the nonetheless discounting the payments if it chooses to
do so.
Step 4: Allocate the transaction price to the

performance obligations
Requirement (e):
The transaction price is allocated entirely to the single
performance obligation of transferring the lot together
with the house design and the house.
Step 5: Recognize revenue when (or as) the entity

satisfies a performance obligation
Requirement (f):
Entity X recognizes revenue when control over the
property (house and lot) is transferred to the
customer.
Requirement (e):
Apr. Cash (6M x 20%) 1,200,
1,
Receivable (6M x 80%) 000
20x
1 Contract liability 4,800, 6,000,0
000 00
“Receivable” is debited instead of “Contract asset” because Entity

X has an unconditional right to the consideration, i.e., the
contract is non-cancellable and the installment payments are due
at each month-end regardless of the performance completed to
date.
PFRS 15 states that, “A right to consideration is
unconditional if only the passage of time is required before
payment of that consideration is due, even if the amount is subject
to refund in the future.”
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ACTIVITY 2:
Solutions:
Step 1: Identify the contract with the customer
Requirement (a): YES, the contract qualifies for

accounting under PFRS 15 because all the requirements
of “Step 1” are met. (See also discussion in Activity 1.)
Step 2: Identify the performance obligations in the

contract
Requirement (b):
The promises to provide the various services
(architectural, engineering, electrical, plumbing and
others) constitute a single performance obligation
because the services are not individually distinct.
This is evidenced by the fact that each of the
services constitutes an integral part of the contract (see
ARTICLE 6 of the contract); each forming an input into the
combined output, which is the completed house – the one
which the customer has contracted Entity Y with.
Furthermore, the customer’s decision of not acquiring a
specific service affects the other services because the
customer is precluded from subcontracting any of those
services (ART. 9).
Although the customer can benefit from each of
the services (as evidenced by the fact that Entity Y
regularly sells each service separately), that ability is
limited because of the reasons stated above.
 Satisfaction of the performance obligation

The single performance obligation is satisfied over time
because the criteria under PFRS 15 are met.
Criteria to be satisfied over Analysis (for Entity Y)

time
A performance obligation is
satisfied over time if one of the
following criteria is met:
a. The customer Criteria (a) and (b) are met
simultaneously receives and because, although Entity Y has
P a g e | 27
consumes the benefits the right to supervise the

provided by the entity’s construction activity, the
performance as the entity customer retains ownership
performs. over any structure built on the
lot. This is evidenced by the fact
b. The entity’s performance that, in case the contract is
creates or enhances an cancelled, any progress on the
asset (e.g., work in contract inures to the benefit of
progress) that the customer the customer.
controls as the asset is
created or enhanced.
c. The entity’s performance Criterion (c) is met because of

does not create an asset the following reasons:
with an alternative use to a. The asset has no alternative
the entity and the entity has use to Entity Y because it
an enforceable right to belongs to the customer
payment for performance during and after the
completed to date. construction.
b. Entity Y has an enforceable
right to payment for
performance completed to
date because the
subsequent billings are
based on Entity Y’s progress
on the contract and if the
contract is cancelled, Entity
Y has the right to payment
for any progress on the
contract.
Step 3: Determine the transaction price

Requirement (c):
The transaction price is equal to the fixed fee of
₱8,000,000.
 Accounting for the variable consideration

Not applicable.
 Significant financing
There is no significant financing component in the
contract because the payments are due within 2 weeks
after billing.
Step 4: Allocate the transaction price to the

performance obligations
P a g e | 28
Requirement (d):
The transaction price is allocated entirely to the single
performance obligation of completing the construction of
the house in accordance with the agreed specifications.
Step 5: Recognize revenue when (or as) the entity

satisfies a performance obligation
Requirement (e):
Entity Y recognizes revenue over the construction
period based on the measure of its progress towards the
complete satisfaction of the performance obligation. This
requires Entity Y to determine an appropriate method for
measuring its progress. Because of insufficient
information given in the problem, the appropriate
measure of progress is presumed to be the “cost-to-
cost” method (an application of the inputs method).
Requirement (f):
Sept Cash (8M x 15%) 1,200,
. 1, 1,200,0
Contract liability 000
20x
1
to record the mobilization fee 00
received at contract inception
Oct. to Contract costs 2,422,00

Dec. 2,422,0
Cash (or other appropriate 0
20x1
accounts) 00
to record the contract costs
 The percentage of completion in 20x1 is computed as

follows:
8,000,00
Total contract price 0
(a
) Costs incurred to date 2,422,000
(not
Estimated costs to complete needed)
(b Estimated total contract costs (see ‘bill 6,920,00
) of materials’) 0
1,080,00
Expected gross profit from contract 0
Multiply by: Percentage of completion (a) 35%
P a g e | 29
÷ (b)
Gross profit earned to date 378,000
Less: Gross profit earned in previous
years -
378,00
Gross profit for the year 0
Dec. Receivable (8M x 35%) 2,800,00

20, 2,800,0
Contract liability 0
20x1
to record the first quarterly 00
billing
Dec. Cash (2.8M x 90%) 2,520,00
23, 2,520,0
Receivable 0
20x1
to record the collection on the 00
billing
 The revenue and cost of construction in 20x1 are

computed as follows:
Total contract price 8,000,000

Multiply by: Percentage of completion 35%
Revenue to date 2,800,000
Less: Revenue recognized in previous yrs. -
2,800,00
Revenue for the year 0
(2,422,00
Cost of construction (squeezed) 0)
Gross profit for the year (see computation
above) 378,000
 Year-end adjusting entries:

Dec. Contract liability 2,800,0
31,
Revenue 00 2,800,
20x1
000
Dec. Cost of construction 2,422,00
31,
Contract costs 0 2,422,00
20x1
0
Requirement (h):
Entity Y
Statement of financial position
As of December 31, 20x1
Current assets
Receivable (2,800,000 - 2,520,000) 280,000
P a g e | 30
Total current assets 280,000
Current liabilities
Contract liability (1.2M + 2.8M – 2.8M)
1,200,000
1,
Total current liabilities
200,000
Entity Y
Statement of profit or loss
For the year ended December 31, 20x1
Revenue 2,800,000
Cost of construction (2,422,000)
Gross profit 378,000
Other operating expenses -
Profit for the year 378,000
P a g e | 31
PROBLEM 6: FOR CLASSROOM DISCUSSION

1. B
2. D
3. D
4. B The goods and services are not distinct because

they are not separately identifiable from each other.
This is evidenced by the fact that the entity provides a
significant service of integrating the goods and
services (the inputs) into the hospital (the combined
output) for which the customer has contracted.
5. D
6. B
7. C Statements a, b and d are correct. The entity does

not have a right to payment for performance
completed to date because even though the payments
are nonrefundable, the cumulative amount of those
payments is not expected, at all times throughout the
contract, to at least correspond to the amount that
would be necessary to compensate the entity for
performance completed to date. This is because at
various times during construction the cumulative
amount of consideration paid by the customer might
be less than the selling price of the partially
completed equipment at that time. Since the entity
does not have a right to payment for performance
completed to date, the entity does not need to assess
whether the equipment would have an alternative use
to the entity. The performance obligation does not
meet the requirement to be satisfied over time; thus,
it is treated as satisfied at a point in time.
8. C (10M x 115%) = 11.5M
9. A
10. B
11. Solution:
 Estimated total contract costs:

P a g e | 32
5,500,00
Direct materials 0
2,800,00
Direct labor 0
Costs of design directly related to the contract 200,000
Costs of technical assistance not directly
related to the
contract (properly allocated) 50,000
Costs of rectification work chargeable to
customer 300,000
Administrative costs reimbursable by the
customer 130,000
Insurance costs 20,000
1,000,00
Construction overheads 0
10,000,0
Estimated total contract costs 00
 Total costs incurred to date:

3,000,00
Costs of materials used in the construction 0
1,500,00
Costs of construction labor 0
Costs of design directly related to the contract 100,000
Costs of technical assistance not directly
related to the
contract (properly allocated) 25,000
Administrative costs reimbursable by the
customer 120,000
Insurance costs 15,000
Construction overheads 240,000
5,000,00
Total costs incurred to date 0
Percentage of Total costs incurred to date

=
completion Estimated total contract costs
Percentage of completion = 5,000,000 ÷ 10,000,000

Percentage of completion = 50%
P a g e | 33
12. Solutions:
Requirement (a):
 Gross profits
20x1 20x2 20x3
10,000, 10,000, 10,000,00
3,150,0 5,680,0
(a) Costs incurred to date 00 00 7,120,000
complete 00 00 -
Estimated total contract 7,000,0 7,100,0
(b) costs 00 00 7,120,000
3,000,0 2,900,0
Expected gross profit 00 00 2,880,000
Multiply by: % completion
(a) ÷ (b) 45% 80% 100%
1,350,0 2,320,0
Gross profit earned to date 00 00 2,880,000
Less: Gross profit in prior (1,350,0 (2,320,00
yrs. - 00) 0)
1,350, 970,00
 Revenues
20x1 20x2 20x3
10,000,0 10,000,0 10,000,0
Multiply by: % of completion 45% 80% 100%
4,500,0 8,000,0 10,000,
Less: Revenue recognized in (4,500,0 (8,000,0
prior yrs. - 00) 00)
4,500,0 3,500,0 2,000,0
(3,150,0 (2,530,0 (1,440,0
Cost of construction * 00) 00) 00)
1,350,0
Gross profit for the year 00 970,000 560,000
* Equal to the contract costs incurred per year (or simply

‘squeezed’):
20x1: 3,150,000
20x2: (5,680,000 – 3,150,000) = 2,530,000
20x3: (7,120,000 – 5,680,000) = 1,440,000
P a g e | 34
 20x1
3.15M 3.15M
(b) Billing:
4M 4M
P a g e | 35
(c) Collection:
Cash 3.6M Cash 3.6M
3.6M 3.6M
Revenue 4.5M
4.5M
Contract costs
3.15M
 20x2
Construction in progress Contract costs 2.53M
2.53M(a) Cash (or other accounts)
Cash (or other accounts) 2.53M
2.53M
5M 5M
Cash 4.5M Cash 4.5M
4.5M 4.5M
Construction in progress 970K Revenue
Revenue 3.5M
3.5M
Contract costs
2.53M
(a)
(5,680,000 costs incurred to date in 20x2 – 3,150,000 costs incurred in
20x1) = 2,530,000
 20x3
1.44M(b) Cash (or other accounts)
1.44M
1M 1M
Cash 1.9M Cash 1.9M
1.9M 1.9M
Cost of construction Contract liability 2M
P a g e | 36
1.44M Revenue
Construction in progress 560K 2M
Revenue
2M
10M Contract costs
10M
(b)
(7,120,000 costs incurred to date in 20x3 – 5,680,000 costs incurred to
date in 20x2) = 1,440,000
 The ₱500K debit balance in the contract liability account on 12/31/x1

is presented as contract asset.
P a g e | 37
13. Solution:
Requirement (a):
20x1 20x2 20x3
3,150,00 2,530,00 4,320,0
Revenue (a) 0 0 00
Contract costs incurred (3,150,0 (2,530,0 (1,440,00
per yr.(b) 00) 00) 0)
Gross profit for the 2,880,
year - - 000
(a)
Revenues in 20x1 and 20x2 are equal to the costs incurred
during those years. Revenue in 20x3 is equal to the contract price
less the revenues recognized in 20x1 and 20x2 (10M – 3.15M –
2.53M = 4.32M).
(b)
20x1: 3,150,000
20x2: (5,680,000 – 3,150,000) = 2,530,000
20x3: (7,120,000 – 5,680,000) = 1,440,000
P a g e | 38
 20x1
3.15M 3.15M
(b) Billing:
4M 4M
(c) Collection:
Cash 3.6M Cash 3.6M
3.6M 3.6M
Revenue Revenue
3.15M 3.15M
Contract costs
3.15M
 20x2
2.53M(a) Cash (or other accounts)
2.53M
5M 5M
Cash 4.5M Cash 4.5M
4.5M 4.5M
Revenue Revenue
2.53M 2.53M
Contract costs
2.53M
(a)
(5,680,000 costs incurred to date in 20x2 – 3,150,000 costs incurred in
20x1) = 2,530,000
20x3
1.44M(b) Cash (or other accounts)
P a g e | 39

1.44M
1M 1M
Cash 1.9M Cash 1.9M
1.9M 1.9M
Cost of construction Contract liability 4.32M

1.44M Revenue
Construction in progress 2.88M 4.32M
Revenue
4.32M
10M Contract costs
10M
(b)
(7,120,000 costs incurred to date in 20x3 – 5,680,000 costs incurred to
date in 20x2) = 1,440,000

P a g e | 40
P a g e | 41
14. Solution:
The contract is analyzed as follows:
20x1 20x2 20x3
8,000,00 8,000,00 8,000,00
Contract price 0 0 0
Costs incurred to date 2,850, 6,520, 8,120,00
(a)
000 000 0
Estimated costs to 4,275, 1,630,
complete 000 000 -
costs 000 0 0
875,00 (150,00 (120,
Expected profit (loss) 0 0) 000)
(a)
20x1: 2,850,000
20x2: (2.85M + 3.67M) = 6,520,000
20x3: (2.85M + 3.67M + 1.6M) = 8,120,000
 The contract becomes onerous in 20x2.
20x1 20x2 20x3

8,000,00 8,000,00 8,000,00
Estimated total contract (7,125,0 (8,150,0 (8,120,0
costs 00) 00) 00)
(150,000 (120,000
Expected profit (loss) 875,000 ) )
P a g e | 42
Multiply by: % of 100%

completion (b) 40% N/A
(150,000 (120,000
Profit (loss) to date 350,000 ) )
(350,000 150,000
Profit (loss) in prior yrs. - )
Profit (loss) for the 350,00 (500,00 30,000
year 0 0)
(b)
2.85M costs incurred in 20x1 ÷ 7.125M estimated total contract costs =
40% complete
Checking: 350,000 – 500,000 + 30,000 = -120,000 actual total

loss on contract
The amounts recognized in profit or loss are computed as

follows:
20x1 20x2 20x3
8,000,0 8,000,00
Total contract price 00 8,000,000 0
Multiply by: % of 80
completion (c) 40% % 100%
3,200,0 6,400,0 8,000,00
(3,200,0 (6,400,0
Revenue in prior years - 00) 00)
3,200,0 3,200,0 1,600,00
(2,850,0 (3,670,00 (1,600,0
Costs of construction 00) 0) 00)
Gross profit (loss) for (470,000
the year 350,000 ) -
Loss on onerous (30,0
contract (d) - 00) -
Gain on reversal of
provision 30,000
350,00 (500,00
Profit (loss) for the year 0 0) 30,000
(c)
6.52M costs incurred to date in 20x2 ÷ 8.15M estimated total contract
costs in 20x2 = 80% complete
(d)
500,000 required loss – 470,000 = 30,000 loss provision
P a g e | 43
15. Solutions:
The gross profits in 20x1 and 20x2 are computed as

follows:
20x1 20x2
6,000,0 6,500,0
Total contract price (1) 00 00
1,350,0 3,610,0
(2)
(a) Costs incurred to date 00 00
2,400,0 190,00
Estimated costs to complete (given) 00 0
3,750,0 3,800,0
(b) Estimated total contract costs 00 00
2,250,0 2,700,0
Expected gross profit from contract 00 00
Multiply by: Percentage of
completion (a) ÷ (b) 36% 95%
810,0 2,565,0
Gross profit earned to date 00 00
Less: Gross profit earned in previous (810,00
years - 0)
810,0 1,755,
Gross profit for the year 00 000
(1)
The bonus is included in the transaction price only in 20x2 when it
became highly probable that Zevrek Co. will receive the bonus. The
transaction price in 20x2 is computed as (6M contract price + 500,000
bonus = 6,500,000).
(2)
The costs incurred to date in 20x2 is computed as (1.35M costs in 20x1 +
2.26M costs in 20x2) = 3.61M.
The revenues in 20x1 and 20x2 are computed as follows:

20x1 20x2
6,000,00 6,500,00
Multiply by: Percentage of
completion 36% 95%
2,160,0 6,175,00
Revenue to date 00 0
Less: Revenue recognized in (2,160,00
previous yrs. - 0)
2,160,0 4,015,0
Revenue for the year 00 00
(1,350, (2,260,0
P a g e | 44
1,755,00
Gross profit for the year 810,000 0
16. Solution:
20x1 20x2
10,000,0 10,000,0
(6,000,0 (6,000,0
Estimated total contract costs 00) 00)
Expected total profit from 4,000,00 4,000,00
construction 0 0
1,680,00 3,200,00
Gross profit to date 0 0
Gross profit recognized in prior - (1,680,0
years 00)
1,680,0 1,520,0
Gross profit for the year 00 00
20x1 20x2
10,000,0 10,000,0
4,200,00 8,000,00
Revenue to date 0 0
(4,200,0
Revenue in prior years - 00)
4,200,0 3,800,0
Revenue 00 00
(2,520, (2,280,
1,680,00 1,520,00
Gross profit for the year (see above) 0 0
Impairment loss on receivable (400,00
(4% x 10M) 0)
1,680,0 1,120,0
Profit for the year 00 00
Notes:
 Unlike the cost-to-cost method, under the output method, the
cost of construction is not equal to the actual costs incurred in
that period.
P a g e | 45
 If the uncertainty in the collectability of contract revenue

arises subsequent to contract inception, the uncollectability is
accounted for as impairment of receivable and/or contract
asset.

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Page | 1

PROBLEM 1: TRUE OR FALSE

PROBLEM 2: MULTIPLE CHOICE – THEORY

Requirement (b): Journal entries

Traditional accounting PFRS 15

Construction in progress 80K 2M

Requirement (c): Financial statements

 The debit balance in the contract liability account on 12/31/x2 is

Requirement (b): Journal entries

Accounts receivable 10M Receivable 10M

Progress billing Cost of construction 1.92M

Requirement (c): Financial statements

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. B 20M x 2/16 = 2,500,000

Total contract price 9,000,000 9,000,000

5. A – No revenue, cost of construction and gross profit

1,500,0 3,876,00 5,720,00

3,000,0 8,364,00 12,280,0

20x1 20x2 20x3

Construction in progress - 12/31/x2 6,400,000

Progress billings - 12/31/x2 (4M + 3M) 7,000,000

20x1 20x2 20x3

5,000,0 5,000,00 5,000,00

(a) 1,425,0 4,040,0 5,080,0

9. C – see previous solution

Step 1: Place given information in pro-forma

Step 2: ‘Squeeze’ for missing information:

Step 3: ‘Squeeze’ some more:

Estimated total contract 30,000,0 31,000,0 30,800,0

Gross profit to date 350,000 900,000

Gross profit in prior years (350,000)

Gross profit for the year 350,000 550,000

Revenue to date 1,400,000 3,600,000

Revenue in prior years (1,400,000)

Revenue for the year 1,400,000 2,200,000

Construction costs (1,050,000 (1,650,00

Gross profit for the year 350,000 550,000

Revenue to date 1,800,000 13,860,000

Revenue in prior years (1,800,000)

Construction costs 1,536,000 9,992,000

Profit (loss) for the year 264,000 2,068,000

PROBLEM 5: CLASSROOM ACTIVITY

Step 1: Identify the contract with the customer

Requirement (a): YES, the contract qualifies for

Step 2: Identify the performance obligations in the

Criteria to be satisfied over Analysis (for Entity X)

following criteria is met:

c. The entity’s performance Criterion (c) is not met because

Step 3: Determine the transaction price

 Accounting for the variable consideration

However, since Entity X does not expect any

Step 4: Allocate the transaction price to the

Step 5: Recognize revenue when (or as) the entity

“Receivable” is debited instead of “Contract asset” because Entity

Step 1: Identify the contract with the customer

Requirement (a): YES, the contract qualifies for

Step 2: Identify the performance obligations in the

 Satisfaction of the performance obligation

Criteria to be satisfied over Analysis (for Entity Y)