Theory:

1. A subsequent change in the transaction price shall be allocated to all of the performance
obligations in the contract.

2. After contract inception, the transaction price cannot change for various reasons, including the
resolution of uncertain events.

3. Which of the following is an example of variations on the contract?

a. Changes in the specifications or design
b. Renegotiations on the originally agreed contract price
c. Changes in the duration of the contract
d. All of the above

4. If the change in the transaction price is attributable to a variable consideration that existed
before a modification that was accounted for as termination of the original contract and the
creation of a new contract, the change in the transaction price is allocated to the performance
obligations in the
a. original contract
b. modified contract
c. new contract
d. old contract

5. Incremental costs of obtaining a contract are recognized as expense when incurred if the
expected amortization is one more than 1 year.

6. Percentage of completion is computed by dividing the estimated total contract costs by the total
costs incurred to date.

7. Total costs incurred to date include the cumulative costs incurred on the contract from the
inception up to the end of the current reporting period.

8. All of the following are included as part of the contract cost except:
a. Cost of materials used in the construction
b. Site supervision cost
c. Cost of negotiating the contract
d. Estimated costs of rectification and guarantee works including expected warranty cost

9. Any incidental income derived from the construction that is not included in contract revenue
shall be accounted for as:
a. Addition to the contract cost
b. Reduction of contract cost
c. Expensed outright
d. Ignore
10. Which of the following costs is expensed when incurred?
a. Depreciation of equipment used in the construction
b. Estimated cost of rectification and guarantee works including expected warranty cost
c. Costs that relate to partially satisfied performance obligations in the contract
d. Site supervision cost

11. Cost escalations are accounted for as:

A. Addition to the total contact price
B. Deduction from the total contact price
C. It has no effect on the total contract price
 12. In the actual cost approach, the revenue is composed of the actual cost incurred and the profit
for each year.
A. True
B. False

13. When receivable is less than the progress billings, there is a___________.
A. Contract liability
B. Contact asset

14. Contract liability means that:

A. Billed price is equal to what is earned
B. Billed price is more than earned
C. Billed price is less than earned

15. Incentive payments are included in the transaction price when it is highly probable that a
significant reversal in the amount of cumulative revenue recognized will occur.

16. Incentive payments are additional amounts paid by the contractor if specified performance
standards are met.

17. When incentive payments are included in the transaction price, this means that it is also
included in the contract revenue

18. Incentive payments may be granted on a cost plus contract to discourage cost-efficiency

19. If the entity cannot demonstrate that a performance obligation is satisfied over time, it is
presumed that the performance obligation is satisfied at a point in time.

20. Construction is completed on the last year of 3-year contract, revenues to be recognize each
year before the year of completion are the same under at a point in time and zero profit method.

21. Which of the following indicates that a performance obligation is satisfied at a point in time?
A. The customer simultaneously receives and consumes the benefits provided by the entity’s
performance as the entity performs.
B. The entity’s performance creates an asset with an alternative use to the entity and the entity
does not have an enforceable right to payment for the performance completed to date.
C. The entity’s performance creates or enhances an asset that the costumer controls as the asset
is created or enhanced.
D. The entity’s performance does not create an asset with an alternative use to the entity and the
entity has an enforceable right to payment for performance completed to date.

22. Performance obligation is satisfied either:

A. Over time, percentage of completion, or output method.
B. Output or input method.
C. Zero profit or percentage of completion.
D. Percentage of completion, zero profit method or at a point in time.

23. Which of the following is included when using output method?

a. Costs incurred
b. Survey of performance completed
c. Time elapsed
24. Output method recognizes revenue on the basis of?
a. Direct measurements of the value to the customer of the goods and services transferred to
date.
b. Efforts expended relative to the total expected outputs to fully satisfy performance
obligation.
c. Estimation of the stage of completion by reference to the proportion that contracts costs
incurred for work performed to date.

25. Which of the following is the disadvantage of the output method?

a. Outputs used to measure progress may not be directly observable and the information
required to apply them may be costly.
b. Contracts may results to different amounts of revenue, costs, and profit recognized for a
period.
c. Requires an entity to apply a single method of measuring progress consistently for each
performance obligation.

26. Application of the output method may include?

a. Performance completed
b. Resources consumed
c. Machine hours used
d. Professional judgments

27. Direct materials and direct labor are costs that relate directly to a contract.

28. It is a contractual provision that stipulates an increase in the contract price in the event of
increase in certain costs.

29. In accounting for a long-term construction contract for which there is a projected profit, the
balance in the Construction in Progress account at the end of the first year of work using the
percentage-of-completion method would be
a. zero.
b. the same as the completed-contract method.
c. higher than the completed-contract method.
d. lower than the completed-contract method

30. A company uses the percentage-of-completion method to account for a four year construction
contract. Progress billings sent in the second year that were collected in the third year would
a. be included in the calculation of the income recognized in the second year.

b. be included in the calculation of the income recognized in the third year.

c. be included in the calculation of the income recognized in the fourth year.

d. not be included in the calculation of the income recognized in any year.

PROBLEMS:

1. Corona Virus Company began work on a project that has a contract price of Php 5,000,000. At
the beginning of 2020, a change order increased the initial contract price by Php 250,000. The
company uses the percentage-of-completion basis of revenue recognition. In relation to the
project, the following data are obtained:

2020 2021
Cost incurred to date…….. P 2,530,000 P 4,350,000
Estimated costs to complete 2,500,000 840,000
Billings made……………… 2,870,000 4,850,000
Collection made…………… 2,050,000 4,060,000

What is the gross profit (loss) should Corona Virus Company recognize in 2020?

2. Bryant Construction Company enters into contract with a customer for the construction of a
building on July 1, 2020. The contract price is Php 5,000,000. However, Bryant is entitled to a
bonus of Php 500,000 if the building is completed within 3 years. Bryant Co. uses the cost-to-
cost method in measuring its progress on the contract. At contract inception, Bryant Co.
estimates a total contract cost of Php 3,000,000.

In 2020, Bryant Co. incurs total costs of Php 1,260,000. On December 31, 2020, due to bad
weather conditions, Bryant Co. does not expect that it can finish the building on time for it to
be entitled to the bonus. The estimated costs to complete as of the end of 2020 are Php
1,890,000.

On January 2, 2021, Bryant Co. and the customer agree to modify the contract to change the
design and location of the staircase. The modification increased the contract price and the
estimated total contract costs to Php 5,800,000 and Php 3,500,000, respectively. On this date,
due to improvements in weather conditions, Bryant Co. now expects that it is highly probable
that it can finish the building on time for it to be entitled to the bonus.

In assessing the contract modification, Bryant Co. concludes that the remaining goods and
services to be provided using the modified contract are not distinct from the goods and
services transferred on or before the date of contract modification; that is, the contract
remains a single performance obligation.

What is the revenue for 2020 and the cumulative catch-up adjustment to revenue to be
recognized on contract modification date on January 2, 2021, respectively?

3. In 2020, Taal Co. entered into a fixed price contract with Volcano, Inc. to construct a building
for Php 9,000,000. In 2021, the design of the building was changed. As a result, the initial
price is decreased by Php 1,500,000. The construction was started in 2020 and was completed
in 2022. Taal Co. uses the cost-to-cost method in measuring its progress on the construction
contract.

Information on the construction is provided below:

Contract costs incurred Estimated total
each year contract costs
2020 P 1,000,000 P 9,100,000
2021 4,000,000 8,000,000
2022 1,500,000 -

The costs incurred in 2022 included costs of variations in contract work amounting to Php
50,000. These costs were due to Volcano’s fault and it is currently being disputed by Taal.
 Negotiations with Volcano have reached an advanced stage such that it is probable that
Volcano will accept the claim for the Php 50,000 reimbursement. Taal assessed that it has
an enforceable right over the claim. The claim is expected to be received in January 2023.

Compute for the profit (loss) in 2020, 2021 and 2022, respectively.

4. ZZZ Co. was contracted by AAA Inc. for the construction of a building in 2020 for a contract
price of 3,000,000.00. The estimated costs to complete for the year 2020 are 1,800,000.00
and 700,000.00 for the year 2021. Costs incurred to date are 700,000.00 and 1,300,000.00
respectively. Estimated gross profit for the year 2021 amounts to 1,000,000.00

Compute for the percentage completed in 2021.

5. On January 1, 2020 ABC Co, a construction contractor was contracted to build a flyover for a
fixed contract price of 5,000,000. Information on the costs of the construction is as follows:
2020 2021 2022
Costs Incurred to 1,800,000.00 1,000,000.00 700,000.00
Estimated costs to 1,800,000.00 400,00.00 -
complete

Compute for the gross profit using the proportional cost approach for year 2022.

6. XYZ Builders was constructed on January 1, 2020 to build an amusement park for a contract
price of 6,000,000.00. The proportional cost approach is used for revenue recognition. The
company records show the following on a recently completed project.

Actual costs incurred 2,200,000.00

Estimated costs to complete 1,000,000.00
Percentage completed 68.75%
Progress billings 2,000,000.00
Collections 1,800,000.00

What is the revenue to be recognized for the year 2020?

7. Atlas Construction Co. has used the cost-to-cost method of recognizing revenue. The following
incomplete records were provided for a recently completed building project.

2012 2013 2014

Contract Price P20,000,000
Gross profit (loss) 400,000 P1,400,000 P (200,000)
Cost incurred 3,600,000 ? 8,200,000

a. How much cost was incurred in 2019?

b. What percentage (rounded) of the project was completed by the end of 2013?

8. High Rise Corp. has entered into a very profitable fixed price contract for constructing a
condominium building over a period of three years, with a total estimated cost of P18 million.
It incurs the following costs relating to the contract during the first year of construction:

Materials P 2.5 million

Site labor costs 2.0 million
Agreed administration costs as per
contract to be reimbursed by the customer 1.0 million
Depreciation of plant used for the construction 0.5 million
 Marketing costs for selling condo units when
they are ready for occupancy 0.5 million

What is the percentage of completion of this contract?

9. AIP Co. entered into a contract for the construction of a building in 20x1. Information on costs
is as follows:
20x1 20x2
Total costs incurred to date 1,200,000 2,500,000
Estimated costs to complete 2,800,000 500,000

Compute for the following:

a. Percentage of completion as of December 31,20x1.
b. Percentage of completion as of December 31,20x2.
c. Percentage completed in 20x2.

10. A contractor entered into a contract to build a building at a contract price of 1,000,000. Gross
profit is to be recognized using the percentage of completion method. The data below shows
the activities on the construction for the year 2020 to 2022:

Actual cost Gross Profit (Loss)

incurred
2020 250,000 50,000
2021 400,000 150,000
2022 200,000 (50,000)
What is the estimated cost to complete in 2021?

11. XXX builders entered into a construction contract to construct an office building that called
for a contract price of 5,000,000. The actual cost incurred in 2018, 2019 and 2020 were P
500,000, P 2,000,000 and 1,300,000 respectively. The gross profit in 2018 was P 500,000
while the estimated cost to complete was 2,000,000. The building was 85% complete as
December 31, 2020. What is the percentage of completion and the percentage completed as of
December 31, 2019?

12. Dumbo Co. was subcontracted to construct the first portion of a four lane expressway for a
contract price of P 9,500,000. The cost incurred in 2016 and 2017 were P 3,000,000 and P
2,550,000 respectively. The estimated cost to complete was P 2,500,000 in 2016 and P
1,500,000 in 2017. How much is the estimated total contract cost in 2017?

13. JK builders entered into a construction agreement for a contract price of P 3,000,000. The
architect’s estimate was used in the computation of gross profit. The data that follows
summarizes the activities of JK for the year 2015 through 2017:

Cost Estimated Percentage

incurred to cost to completed
date complete
2015 850,000 1,000,000 25%
2016 1,500,000 800,000 45%
2017 2,200,000 0 30%

Compute for the revenue recognized for each of the three years using the actual cost
approach.
14. On January 1, 2020, Jack Co. entered into a contract to construct a building. The building
was expected to be finished within 5 years. The contract price will be billed at cost plus a fixed
fee of ₱1,000,000. If the building is completed within the budgeted construction period, an
incentive payment of ₱500,000 shall be given to Jack.

At the end of 2023, Jack estimated that the building will be completed earlier and it is highly
probable that Jack will realize the incentive payment. All cost are recoverable.
Information on the project s shown below:
2020 2021 2022
Cost each year 1,000,000 2,000,000 1,500,000
Est. cost to 4,000,000 2,000,000 500,000
complete

Compute for the revenue and profit for year 2021 and 2022.

15. On February 16, 2020, Sparrow Co. entered into a contract for the construction of a house.
The contract price is ₱5,500,000. Sparrow will be entitled to an incentive of ₱555,000 if the
house is completed within 3 years. Sparrow uses the ‘cost-to-cost’ method in measuring its
progress on the contract. At that same date, Sparrow estimates a total contract cost of
₱4,800,000.
In 2020, Sparrow Co. incurs a total cost of ₱1,567,000 and the estimated cost to complete is
₱2,545,000. Due to a fortuitous event, Sparrow does not expect to finish the house on time.
In 2021, Sparrow incurs a total cost of ₱2,976,000 and the estimated cost to complete is
₱245,000. Due to prudent planning, Sparrow expects that the house will be finished on time
that it is highly probable that a significant reversal in the amount of cumulative revenue
recognized will not occur when the uncertainty associated with the variable consideration is
subsequently resolved.
Compute for the contract price, percentage of completion and revenue for 2020 and 2021

16. Violet company uses the percentage of completion method for long-term construction
contracts. The company started the project with a contract price of ₱2,750 in 2020. Given the
following data, what is balance of Construction in Progress under percentage of completion for
this contract at the end of 2020?

2020 2021
Cost incurred each year ₱400 ₱500
Est. cost remaining at the end of the 1,600 1,000
year

17. In 2019, Pangito Co. enters into a construction contract with a customer. The contract price is
6,000,000.00
Additional Information:
2020 2019
Actual costs incurred each year 2,250,000.00 2,250,000.00
Estimated remaining costs 2,250,000.00
Progress billings 3,600,000.00 2,400,000.00
Collections in progress billings 4,000,000.00 2,000,000.00

At a contract inception, Pangito Co. assesses its performance obligations in the contract and
concludes that it has a single performance obligation that is satisfied at a point I time when
the construction is completed and the control over the promised good is transferred to the
customer.
Compute for the revenue, cost of construction, and gross profit to be recognized in 2019 and
2020, respectively.
18. Information on Taylor Hot Co.’s construction contracts with costumers which commenced
during 2019 is shown below:
Contract 1 Contract 2
Contact Price 420,000.00 300,000.00
Costs incurred during the year 240,000.00 280,000.00
Estimated cost to complete 120,000.00 40,000.00
Progress billings 150,000.00 270,000.00
Collections 90,000.00 250,000.00
At a contract inception, Taylor Hot Co.’s assessed that its performance obligation in each of
Contract 1 and Contract 2 is satisfied at a point in time, that is, when the construction is
completed.

Compute for the total profit(loss) recognized from the two contracts in 2019.

19. In 2019, Brooks Co. started work on three contracts. Information of these contracts is shown
below:
Contracts Transaction Price Cost Estimated remaining
Incurred costs
Contract 1 500,000.00 375,000.00
Contract 2 700,000.00 100,000.00 400,000.00
Contract 3 250,000.00 100,000.00 100,000.00
The performance obligations of Brooks Co. in all of the contracts are satisfied at a point in
time.

Compute for the total revenue, cost of construction, and profit recognized in 2019 and 2020,
respectively.

20. In 20x1, Scottie Co. enters into a construction contract with a customer. The transaction price
in the contract is 1,200,000.00. At contract inception, Scottie Co. estimates a total contract
cost of 944,000.00. The actual costs incurred in 20x1 are 590,000.00. The estimated cost to
complete on December 31, 20x1 is 410,000.00. The progress billing during the year amount to
70,000.00, 60,000.00 of which is collected.
The performance obligation of Scottie Co. in the contract is satisfied at a point in time.
Compute for the revenue, cost of construction, and profit recognized in 20x1.

21. AA company has an ongoing construction contract with a fixed amount of P1M as shown
below:
Cost of construction P600,000
Percent complete (expert judgment) 75%

Compute for gross profit/loss for the year.

22. The following information of JJ company shown below:

Contract Price P1,500,000
Cost of construction P600,000(1st year); 650,000(2nd year)
Percent complete (expert judgment) 75%(1st year) ; 100%(2nd year)

Compute for gross profit/loss for the year.

23. ABC Co. contracted to construct a road consisting of 50 kilometers for 15M. ABC Co. uses the
output method based on the physical proportion of contract work in estimating the stage of
completion of a project. Information on the project are as follows:
 Year 1 Year 2
Cost incurred each year 2.3M 3.4M
Estimated costs to complete 7.5M 3.0M
No. of kilometers completed during the year 10.0M 20.0M
Compute for the revenue for year 1 and year 2.
Using the same information above, compute for the contract revenues.

24. XYZ started work on a construction contract in 2000. The contract price is 1,600,000.
However, the contractual agreement stipulates that if the cumulative inflation reaches or
exceeds 20%, the contract price shall be adjusted upwards by 5%. (Round off rate of
completion to whole number)

Additional Information:

2000 2001

Cost incurred to date 550,000 800,000

Estimated cost to complete 825,000 150,000

Cumulative inflation rate 10% 21%

Compute for the contract price in 2000 and 2001. Compute for the profit for 2000 and 2001.

25. On January 1, 2018, ABC. Co. entered into a contract for the construction of a building. The
project was initially estimated to have a completion period of 5 years. If the project is
completed within the budgeted construction period, an incentive payment of 300,000 shall be
provided to ABC.
Information on the project is shown below:
2018 2019 2020 2021
Costs incurred to date 2,500,000 5,240,000 8,000,000 9,550,000
Estimated costs to complete 7,500,000 4,860,000 2,200,000 750,000

As of December 31, 2021, ABC assessed that the project will be completed earlier than
expected and, thus, ABC will be entitled to the incentive payment. It is highly probable that
ABC will realize the incentive payment. All costs are recoverable.
Assuming that the final contract price will be billed at cost plus 20%, compute for the contract
revenue, cost of construction, and profit for the years 2018, 2019, 2020 and 2021.

26. On January 1, 2018, ABC. Co. entered into a contract for the construction of a building. The
project was initially estimated to have a completion period of 5 years. If the project is
completed within the budgeted construction period, an incentive payment of 300,000 shall be
provided to ABC.
Information on the project is shown below:
2018 2019 2020 2021
Costs incurred to date 2,500,000 5,240,000 8,000,000 9,550,000
Estimated costs to complete 7,500,000 4,860,000 2,200,000 750,000

As of December 31, 2021, ABC assessed that the project will be completed earlier than
expected and, thus, ABC will be entitled to the incentive payment. It is highly probable that
ABC will realize the incentive payment. All costs are recoverable.
Assuming that the final contract price will be billed at cost plus a fixed fee of P1,500,000,
compute for the contract revenue, cost of construction, and profit for the years 2018, 2019,
2020 and 2021
27. DFG Builders started a work on two separate projects during 2020. Contract price will be
billed at a cost plus a fixed fee of 500,000 for project A and 750,000 for project B. Additional
information on these projects is shown below:
Estimated costs
Project Costs incurred to complete
A 6,500,000 2,100,000
B 5,000,000 1,200,000
Compute for the balances of construction in progress accounts of these projects as of
December 31, 2020.

28. DEF Builders enters into a construction contract in January 1, 2020. Information on the
project is shown below.

2020 2021 2022

Estimated contract cost 8,000,000 8,200,000 8,300,000
Estimated costs to complete 6,500,000 4,860,000 2,200,000

Assuming that the final contract price will be billed at cost plus 15%, compute for the contract
revenue and profit for the years 2020, 2021 and 2022.

29. ABCD started work on a construction contract in 2020. The contract price is 15,000,000. The
contractual agreement stipulates that if the cumulative inflation reaches or exceeds 40%, the
contract price shall be adjusted upwards by 15%. (Round off percentage of completion to
whole number)

Additional Information:

2020 2021

Cost incurred to date 2,500,000 6,500,000

Estimated cost to complete 10,000,000 3,500,000

Cumulative inflation rate 20% 45%

Compute for the profit for 2020 and 2021.

30. ZZZ started work on a construction contract in 20x5. The contract price is 800,000.
However, the contractual agreement stipulates that if the cumulative inflation reaches or
exceeds 25%, the contract price shall be adjusted upwards by 10%. (Round off rate of
completion at whole number)

Additional Information:

20x5 20x6

Cost incurred to date 350,000 500,000

Estimated cost to complete 400,000 150,000

Cumulative inflation rate 15% 25%

Compute for the profit for 20x5 and 20x6.