Long Term Construction

8/3/2019 Long Term Construction

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Long Term construction

On January 2, 2008, JGG Builders Corp. of I locos enters into a contract to construct a building for P

40,000,000. 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 2008:

Cost Incurred Estimated Costs Contract

In 2008 to Complete Price

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

Under the percentage of completion method, what is the gross profit to be recognized on December 31,

2008 (Rounded to the nearest peso)?

a. P 907,828 b. P 888,889 c. P 909,063 d. P 970,830

In 2006, Builders agreed to construct a commercial building at a price of P 1,000,000. South Builders

uses the percentage of completion method of recognizing revenue on long term construction projects.

The data relating to the projects from 2006-2008 are as follows:

2006 2007 2008

Cost Incurred each year 280,000 320,000 185,000

Estimated Cost o complete 520,000 200,000 -

Billings Date 150,000 400,000 1,000,000

Collection of billings date 120,000 320,000 940,000

What is the amount of gross profit to be recognized in 2007?

a. 80,000 b. 78,500 c. 85,000 d. 90,000

Using the above information, what is the balance of construction projects net contract billings account

of south builders December 31, 2007 balance sheet?

a. 350,000 b. 300,000 c. 550,000 d. 380,000

Using the above information, assuming the company uses the zero profit method of recognizing revenue

from the project, what is the balance of the construction in progress account net of contract billings as

of December 31, 2007?

a. 200,000 b. 250,000 c. 350,000 d. 300,000

North Construction Company uses the percentage of completion method of recognition gross profit on

long term construction contracts. The company started work on the two contracts during 2007. Data

relating to the two contracts are given below:

Contracts price Actual cost 12/31/2007 estimated cost to complete

Contract 1 P 1, 800,000 P 450,000 P 450,000

Contract 2 1, 350,000 262,500 487,500


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In 2008, contrast 3 was started for a contract prize of P 2, 700,000. As of December 31, 2008, the

following data are available:

Actual cost 1/1/07-12/31/08 Estimated Cost to Complete

Contract 1 840,000 210,000

Contract 2 540,000 360,000

Contract 3 540,000 960,000

How much income is to be recognized in 2008?

a. 1,302,000 b. 432,000 c. 642,000 d. 270,000

Using the information above, what is the balance of the construction in progress account as of

December 31, 2008?

a. 3,222,000 b. 3,942,000 c. 1,920,000 d. 2,562,000

On July 1, 2006, summer construction Corporation contracted to build an office building for JG Inc., Inc.

for a total price of 975,000. Data relating to the project from 2006-2008 are as follows:

2006 2007 2008

Contract Cost 75,000 600,000 1,050,000

Estimated Cost to complete 675,000 400,000 -

Billings to JG Inc. 150,000 550,000 275,000

Summer construction corp uses the zero profit method.

What is the balance of the construction in progress account net of billings at December 31, 20007?

a. P 125,000 due to JG Inc

b. P 125,000 due from JG Inc

c. P 25,000 due from JG Inc

d. P 25,000 due to JG Inc

Assuming the use of the Percentage of Construction method, how much is the gross profit (loss) to be

recognized in 2007?

a. (47,500) b. 47,500 c. (22,500) d. 22,500

West Construction company recognized gross profit of P 31,500 on its long term project what has

accumulated costs of P61,250. To finish the project, the company estimates that it has to incur

additional cost of P122,500. Billings ,made were 40% of the contract price. What is the balance of the

CIP net of billings?

a. 18500 liability b. 18,550 asset c. 50,050 asset d. 50,050 liability

Marlboro Construction company, Inc. entered into a construction contract in 2007 that called for a

contract price of P 9,600,000. At the beginning of 2008, a change order increased the initial contract

price by 480,000. The company uses the percentages of completion method. The following data is

available:

2007 2008

Cost incurred to date 4,920,000 8,640,000

Estimated cost to complete 4,920,000 2,160,000

What is the gross profit or loss should Marlboro company recognize in 2007 and 2008


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2007 2008 2007 2008

a. (240,000) (720,000) c. 240,000 (960,000)

b. (240,000) (480,000) d. 240,000 (720,000)

East Builders works on a 70 million contract in 2008 to construct a shopping mall for SM inc. During

2008, East Builders uses the percentage of completion method of revenue recognition. At December 31,

2008, the account balances are

Construction in progress 24.55 million

Accounts Receivable 2.4 million

Contract Billings 12.0 million

Estimated cost to complete 31.85 million

How much is the actual cost incurred in 2008?

a. 24.5 million b. 49 million c. 7.5 million d. 17.150 million

From BAYSA

Exercise 7-1

In 2006, Durabuilt Engineering entered into an agreement to construct an office building at a contract

price of P 50,000,000. Construction data were as follows:

2006 2007 2008

Construction Cost P 7,500,000 P 27,000,000 P 6,300,000

Estimated Cost to complete 30,000,000 8,625,000 -

Progress Billings 8,000,000 36,000,000 6,000,000

Collection from clients 5, 500,000 33,000,000 11,500,000

Instruction

1. Determine the revenue, cost of revenue and gross profit to be recognized in 2006,20007,20008

using the percentage of completion method and the cost to cost method of estimating the percentage

of work completed.

2. Prepare necessary journal entries to record construction activities for each year, including the

recognized revenue, cost of revenue and gross profit.

3. For 2007, show how the details related to this construction ciontract would be disclosed on the

balance sheet and in the income statement.

2006 2007 2008

Contract price P50,000,000 P50,000,000 P50,000,000

Cost incurred to date P 7,500,000 P34,500,000 P40,800,000

Est. cost to complete 30,000,000 8,625,000 -

__________

Total estimated cost 37,500,000 P43,125,000 P40,800,000

Total estimated gross profit P12,500,000 P 6,875,000 P 9,200,000

Percentage of completion 20% 80% 100%

To Date Recognized in prior year/s To be recognized this year

2006 - Recognized revenue P10,000,000 - P10,000,000

Cost of revenue 7,500,000 - 7,500,000

Gross profit P 2,500,000 - P 2,500,000

2007 - Recognized revenue P40,000,000 P10,000,000 P30,000,000

Cost of revenue 34,500,000 7,500,000 27,000,000

Gross profit P 5,500,000 P 2,500,000 P 3,000,000

2008 - Recognized revenue P50,000,000 P40,000,000 P10,000,000

Cost of revenue 40,800,000 34,500,000 6,300,000

Gross profit P 9,200,000 P 5,500,000 P 3,700,000


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New Dimension Construction Company bagan operations January 1, 2003: During the year

, the company entered into a contract with centurion Company to construct a manufacturing facility. At

that time, new dimension estimated that it would take five years to complete the facility at a total cost

of P 18,000,000. The total contract price for construction of the facility is P 25,000,000. During the year,

the company incurred P 4,400,000 in construction cost related to the construction project. The

estimated cost to complete is P 15,600,000. Centurion was billed and paid 30% of the contract price

subject to a 10% retention fee.

Determine the amount of gross profit for the year ended December 31, 2003.

Determine the balance of AR, CIP, Progress Billings on Construction contracts

ANSWER

1. Contract price P25,000,000

Total estimated cost:

Cost incurred to date P 4,400,000

Estimated cost to complete 15,600,000 20,000,000

Total estimated gross profit P 5,000,000

Percentage of completion ( P 400,000/20,000,000) 22%

Gross profit to be recognized in 2008 P 1,100,000

2. Accounts Receivable (P25,000,000 x 30% x 10%) P 750,000

Construction in Progress (P4,400,000 + P1,100,000) P5,500,000

Progress Billings on Construction Contracts (P25,000,000 x 30%) P7,500,000

2006 2007 2008

a. Construction in progress 7,500,000 27,000,000 6,300,000

Cash, Materials, etc. 7,500,000 27,000,000 6,300,000

b. Accounts Receivable 8,000,000 36,000,000 6,000,000

Progress Billings on Const. Contracts 8,000,000 36,000,000 6,000,000

c. Cash 5,500,000 33,000,000 11,500,000

Accounts Receivable 5,500,000 33,000,000 11,500,000

d. Cost of LTCC 7,500,000 27,000,000 6,300,000

Construction in Progress 2,500,000 3,000,000 3,700,000

Revenue from LTCC 10,000,000 30,000,000 10,000,000

e. Progress Billings on

Construction Contracts 50,000,000

Construction In Progress 50,000,000

Statement of Financial Position

Current Assets:

Accounts Receivable P5,500,000

Current Liabilities:

Progress Billings on Construction Contracts P44,000,000

Less Construction in Progress 40,000,000 P4,000,000


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You were engaged to AUDIT the books of accounts of MMN contractors which had a 3 year construction

contract in 2003 for P9,000,000. MMN uses the percentage of completion method for financial

statement purposes recognized for each year is based on the ration of cost incurred to total estimate

cost to complete the contract.

Data on this contract follows:

Accounts receivable-construction contract billings P 300,000

Construction in Progress P 937,500

Less: Account Billed 843,750

10% retention 93,750

Net Income recognized in 2003 ( before tax) 150,000

MMN Contractors maintain a separate bank account for each construction contract. Bank

deposits to this contract amounted to P 500,000.

1. How much cash collected on the contract was not yet deposited at December 31, 2003?

a. 43,750 b. 1,137,500 c. 193,750 d. 287,500

2. What was the estimated total income before tax on this contract?

a. 450,000 b. 840,000 c. 1,440,000 d. 287,500

Answer Key

Total amount billed P843,750

Less Balance of accounts receivable 300,000

Total collections P543,750

Amount deposited 500,000

Cash collected not yet deposited P 43,750

P150,000 937,500/9,000,000 P1,440,000

On September 14, 2003, NNO Contractors, Inc. won the bid for the construction of a 1,000 room hotel

for hoteliers, Inc. on the reclamation area for 1.2 billion. On the terms of payment, parties agreed on the

following:

One percent mobilization fee (deductible for the final bill) payable within fifteen days after

signing the contract;

Retention of 10% on all billings, payable with the final bill after the acceptance of entire

completed project; and

Progress billings on construction within seven days from the date of acceptance

By the end of 2003, the company presented one progress billings for 10% completion by

hoteliers inc. evaluated and accepted on decmebr 28, 2003 for payment on January. The company used

percentage of completion method of accounting.

In the year 2003 NNO contractors Inc. received a fee of

a. 9.8 million b. 10.8 million c. 12 million d. 1.2 million

ANSWER:

C Mobilization fee (P1.2B x 1%) P 1.2M


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Collections on billings (1.2B x 10% x 90%) 10.8M

Total fee received by NNO P12.0M

Documents

Long Term Construction