Long

LONG-TERM CONSTRUCTION CONTRACTS

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In accounting for long-term construction contracts (those taking longer than one year to complete), the two methods
commonly followed are percentage-of-completion and completed-contract.
(a) The revenue recognized on a long-term construction contract under the percentage-of-completion method is
determined by applying a percentage representing the degree of completion to the total contract price at the end of
the accounting period. The percentage may be derived by dividing the costs incurred to date by the total estimated
costs of the entire contract based on the most recent information. The revenue so derived is then reduced by the
direct contract costs to determine the gross profit recognized in the initial period.
In subsequent periods, since the percentage-of-completion method described produces cumulative results, revenue
and gross profit recognized in prior periods must be subtracted to obtain current revenue and gross profit to be
recognized.
Under the completed-contract method, no earnings are recognized until the contract is substantially completed. For
the period in which completion occurs, gross revenues include the total contract price. Total job costs incurred are
deducted from gross revenues, resulting in recognition of the entire amount of gross profit in the completion period.
If it is expected that a loss will occur on the contract, a provision for loss should be recognized immediately under
both the completed-contract method and the percentage-of-completion method.
(b)
The percentage-of-completion method should be used when estimates of the bases upon which progress is measured
are reasonably dependable and all the following conditions exist:
1.
The contract clearly specifies the enforceable rights regarding goods or services to be provided and received by
the parties, the consideration to be exchanged, and the manner and terms of settlement.
2.
The buyer can be expected to satisfy all obligations under the contract.
3.
The contractor can be expected to perform the contractual obligation.
The completed-contract method should be used when inherent hazards or lack of dependable estimates cause the
forecasts to be of doubtful value.
(c) Under the percentage-of-completion method, a schedule is made of the contracts in process, showing the total costs
incurred as of the end of a given period, the estimated gross profit recognized based on the degree of completion,
and the total billings rendered on each individual contract. If costs incurred plus recognized profits exceed the
related billings on a contract, this net figure is shown as a current asset. This treatment shows that the contractor has
not fully billed the customer for work performed to date and has a claim against the customer for that portion of
work completed but not yet billed. If billings on a contract exceed costs incurred plus estimated profits, this net
figure is shown as a current liability, which means that the contractor has overbilled the customer for work done to
date and must complete the work represented by the excess billings.
Under the completed-contract method, the treatment of excess costs and billings is the same as under the percentageof-completion method except that estimated profits are not computed because profit recognition is deferred until a
contract is completed. The excess of costs over related billings on a contract is a current asset while the excess of
billings over related costs on a contract is a current liability.
PROBLEM 1
Waya Construction Co. has used the cost to cost percentage of completion method of recognizing profits. Lia Ortega
assumes leadership of the business after the retirement of her mother Lyca. In reviewing the records, Lia finds the
following information regarding a recently completed building project for which the total contract was P500,000.
2009
2010
2011
Gross Profit (loss)
P10,000
P35,000
P(5,000)
Cost incurred/year
90,000
?
P205,000
Lia wants to know how effectively the company operated during the last three years on this project and, since the
information is not complete, has asked you to help by answering the following questions
a. How much cost was incurred in 2010?
b. What percentage of the project was completed by the end of 2010?
c. What was the total estimated gross profit on the project by the end of 2010?
d. What was the estimated cost to complete the project at the end of 2010?
e. What percentage of the project was completed by the end of 2009?
PROBLEM 2
In 2009, Golden Engineering entered into an agreement to construct an office building at a contract price of
P5,100,000. Construction data were as follows:
Construction costs
incurred
Estimated costs to
complete
Progress billings
Collections from client
2009
P 750,000
2010
P2,700,000
3,000,000
862,500
570,000
450,000
3,600,000
3,300,000
2011
P 630,000
-930,000
1,350,000
Prepare the necessary entries for each year, assuming the firm uses the:
(1)
(2)
completed-contract method
percentage-of-completion method.
PROBLEM 3
Solidrock Construction contracted to build a ship over a two year period. The contract price was P21,000,000 with an
estimate total cost of P18,400,000. The following cost data relate to the construction period.
Year
2009
2010
2011
Costs Incurred
in Year
P9,000,000
9,500,000
0
Estimated Cost
to Complete
P10,000,000
0
0
Billings
P11,000,000
8,000,000
2,000,000
Cash
Collected
P7,500,000
9,000,000
4,500,000
Prepare the necessary journal entries for 2009, 2010, and 2011 assuming Solidrock uses the percentage-ofcompletion method.
PROBLEM 4
Sealand Construction entered into a contract to construct a floating bridge across a lake. The contract price for the
bridge is P7,500,000. During 2009, costs of P1,800,000 were incurred representing 30% of total expected costs.
Prepare the necessary entries for 2009 to recognize gross profit for the year assuming the firm uses the
(1)
(2)
completed-contract method.
percentage-of-completion method.
PROBLEM 5
.
In 2009, Mandaluyong Builders began construction work under a three-year contract at a price of P7,525,000. The
firm uses the percentage-of-completion method for financial accounting purposes. The income to be recognized each
year is based on the proportion of cost incurred to the total estimated costs for completing the contract. The financial
statement presentations relating to this contract on December 31, 2009, are:
Balance Sheet
Accounts receivable ........................
Construction in progress ...................
Less progress billings .....................
P150,500
P602,000
562,000
Income Statement
Gross profit on construction contracts .....
40,000
P301,000
Determine the
(1)
(2)
cash collected in 2009.

estimated income on the construction contract.
PROBLEM 6
On January 1, 2009, Jaguar Enterprises obtained a contract to construct a building. It was estimated at the beginning
of the contract that it would take three years to complete the project at an expected cost of P200,000. The contract
price was P250,000. The following information describes the status of the job at the close of production each year:
Actual costs incurred ...........

Estimated costs to complete .....
Billings on contract ............
Collections on contract .........
2009
P110,000
100,000
125,000
120,000
2010
P120,000
20,000
125,000
120,000
2011
P15,000
0
0
10,000
Compute the items listed below for each year assuming the use of the percentage-of-completion cost-to-cost method.
(Round all percentages to two decimals).
2009
2010
2011
1. Revenue recognized during the

year ..........................
2. Gross profit recognized during
the year ......................
3. Balance in the construction in
progress account at December 31
(after closing entries) .......
4. Balance in the progress billings
account at December 31 (after
closing entries) ..............
PROBLEM 7
On January 1, 2009, Boston Inc. obtained a contract to construct a building. It was estimated at the beginning of the
contract that it would take 3 years to complete the project at an expected cost of P200,000. The contract price was
P250,000. The following information describes the status of the job at the close of production each year:
Actual costs incurred ............

Estimated costs to complete ......
Billings on contract .............
Collections on contract ..........
2009
P150,000
90,000
110,000
100,000
2010
P100,000
20,000
120,000
120,000
2011
P15,000
0
20,000
30,000
Compute the items listed below for each year assuming the use of the percentage-ofcompletion cost-to-cost
method. (Round all percentages to two decimals.)
2009
2010
2011
1. Construction costs (expense)

recognized during the year ....
the year ......................
progress account at Dec. 31
(after closing entries) .......
4. Balance in accounts receivable
at Dec. 31 (after closing
entries) ......................

Multiple Choice
____
Identify the choice that best completes the statement or answers the question.
1. How should the balances of Progress Billings and Construction in Progress be shown at reporting dates prior to the
completion of a long-term contract?
a. Progress Billings as income, Construction in Progress as inventory.

b. Net, as income from construction if credit balance, and loss from construction if
debit balance.
c. Progress Billings as deferred income, Construction in Progress as a current asset.
d. Net, as a current asset if debit balance and current liability if credit balance.
____
2. If the percentage-of-completion method is used, what is the basis for determining the gross profit to be recognized in
the second year of a three-year contract?
a.
b.
c.
d.
Cumulative actual costs incurred only.

Incremental cost for the second year only.
Cumulative actual costs and estimated costs to complete.
No gross profit would be recognized in year 2.
____ 3.. If the completed-contract method is used, what is the basis for determining the income to be recognized in the second
year of a three-year contract?
a.
b.
c.
d.
____
4. Which of the following would be used in the calculation of the gross profit recognized in the third and final year of a
construction contract that is accounted for using the percentage-of-completion method?
a.
b.
c.
d.
____
Cumulative actual costs incurred only.

Incremental cost for the second year only.
Latest available estimated costs.
No income would be recognized in year 2.
Actual
Contract
Price
Yes
Yes
Yes
No
Income
Previously
Recognized
Total
Costs
Yes
Yes
No
Yes
No
Yes
Yes
Yes
5. Assume the percentage-of-completion method of revenue recognition is used on a long-term construction contract.
Under this method, revenues that are earned but unbilled at the balance sheet date should be disclosed
a. as a long-term receivable in the noncurrent assets section of the balance sheet.

b. only as a footnote disclosure until the customer is billed for the percentage of work
completed.
c. as construction in progress in the current assets section of the balance sheet.
d. as construction in progress in the noncurrent assets section of the balance sheet.
____
6. The completed-contract method of accounting for long-term construction-type contracts is preferable when
a. a contractor is involved in numerous projects.

b. the contracts are of a relatively long duration.
c. estimates of costs to complete and extent of progress toward completion are
reasonably dependable.
d. there are inherent uncertainties in the contract beyond normal business risks.
____
7. Which of the following is not a difference between the percentage-of completion and completed-contract methods of
accounting for long-term construction contracts?
a. They report different amounts for inventory during the construction period.
b. They report different amounts for progress billings during the construction period.
c. They cause a different cash inflow during the construction period.
d. They report different amounts for accounts receivable during the construction
period.
____
8. The theoretical support for using the percentage-of-completion method of accounting for long-term construction
projects is that it
a.
b.
c.
d.
____
is more conservative than the completed-contract method.

reports a lower Net Income figure than the completed-contract method.
more closely conforms to the cost principle.
produces a realistic matching of expenses with revenues.
9. If a company uses the completed-contract method of accounting for long-term construction contracts, then during the
period of construction, financial information related to a long-term contract will
a. appear on both the income statement and balance sheet during the construction
period.
b. appear only on the income statement during the period of construction.
c. appear only on the balance sheet during the period of construction.
d. not appear on the financial statements.
____ 10. When the percentage-of-completion method of accounting for long-term construction projects is used, why is
Construction in Progress increased by the annual recognized gross profit on long-term construction contracts?
a.
b.
c.
d.
The cost of the contract has increased.

The project's value has increased above cost.
The economy experiences inflation over the construction period.
Construction in Progress is not increased by the annual recognized profit.
____ 11. When comparing the percentage-of-completion and completed-contract methods of accounting for long-term
construction contracts, both methods will report
a.
b.
c.
d.
the same balances each period in the Progress Billings account.

the same expense for cost of construction each year.
the same amount of income in the year of completion.
the same inventory carrying value each year during the construction period.
____ 12. 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.
b.
c.
d.
be included in the calculation of the income recognized in the second year.

be included in the calculation of the income recognized in the third year.
be included in the calculation of the income recognized in the fourth year.
not be included in the calculation of the income recognized in any year.
____ 13. 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.
b.
c.
d.
zero.
the same as the completed-contract method.
higher than the completed-contract method.
lower than the completed-contract method.
____ 14. On May 1, 2009, Pateros Construction Company entered into a fixed-price contract to construct an apartment building
for P3,000,000. Pateros appropriately accounts for this contract under the percentage-of-completion method.
Information relating to the contract is as follows:
At December 31:
Percentage of completion ........
Estimated costs at completion ...
Income recognized (cumulative) ..
2009
2010
20%
P2,250,000
P 150,000
60%
P2,400,000
P 360,000
What is the amount of contract costs incurred during the year ended December 31, 2010?
a.
b.
c.
d.
P600,000
P960,000
P990,000
P1,440,000
____ 15. Navotas Construction, Inc. has consistently used the percentage-of-completion method of recognizing income. Last
year Navotas started work on a P4,500,000 construction contract, which was completed this year. The accounting
records disclosed the following data for last year:
Progress billings .....................................

Costs incurred ........................................
Collections ...........................................
Estimated cost to complete ............................
P1,650,000
1,350,000
1,050,000
2,700,000
How much income should avotas have recognized on this contract last year?
a.
b.
c.
d.
P105,000
P150,000
P300,000
P350,000
____ 16. Caloocan Construction, Inc. has consistently used the percentage-of-completion method of recognizing income.
During 2009, Caloocan started work on a P1,500,000 fixed-price construction contract. The accounting records
disclosed the following data for the year ended December 31, 2009:
Costs incurred ........................................

Estimated cost to complete ............................
Progress billings .....................................
Collections ...........................................
P 465,000
1,085,000
550,000
350,000
How much loss should Caloocan have recognized in 2009?
a.
b.
c.
d.
P15,000
P35,000
P50,000
P115,000
____ 17. Pasay Construction Company has consistently used the percentage-ofcompletion method. On January 10, 2009,
Pasay began work on a P3,000,000 construction contract. At the inception date, the estimated cost of construction
was P2,250,000. The following data relate to the progress of the contract:
Gross profit recognized at December 31, 2009 ..........

Costs incurred Jan. 10, 2009, through Dec. 31, 2010 ...
Estimated cost to complete at December 31, 2010 .......
P 300,000
1,800,000
600,000
How much gross profit should Pasay recognize for the year ended December 31, 2010?
a.
b.
c.
d.
P150,000
P262,500
P300,000
P450,000
____ 18. For a construction firm using the completed-contract method, if costs exceed billings on some contracts by P1,000,000
and billings exceed costs by P800,000 on others, the contracts should ordinarily be reported as a
a.
b.
c.
d.
current asset of P200,000.

current liability of P200,000.
current asset of P1,000,000 less a contra-current asset of P800,000.
current asset of P1,000,000 and a current liability of P800,000.
____ 19. Makati Construction Company uses the percentage-of-completion method of accounting. In 2009, Makati began work
on a project which had a contract price of P1,600,000 and estimated costs of P1,200,000. Additional information is
as follows:
Costs incurred during the year ............

Estimated costs to complete, as of
12/31/09 ................................
Billings during the year ..................
Collections during the year ...............
2009
P240,000
960,000
2010
P1,060,000
290,000
250,000
1,310,000
1,200,000
The amount of gross profit Makati should recognize on this contract during 2009 is
a.
b.
c.
d.
P40,000.
P80,000.
P100,000.
P200,000.
____ 20. Pasig Construction Company uses the percentage-of-completion method for long-term construction contracts. A
specific job was begun in 2009 and completed in 2011. The contract price was P1,400,000 and cost information as
of each year-end is given below:
End of year estimated cost to

complete ......................
Annual cost incurred ............
2009
2010
2011
P400,000
400,000
P200,000
400,000
P
0
120,000
Assuming Pasig correctly recorded gross profit in 2009, how much gross profit should the company record in 2010?
a.
b.
c.
d.
P0
P20,000
P300,000
P320,000
The following data relate to a construction job started by Valenzuela Co. during 2009:
Total contract price ..................................

Actual costs incurred during 2009 .....................
Estimated remaining costs .............................
Billed to customer during 2009 ........................
Received from customer during 2010 ....................
P300,000
60,000
120,000
90,000
30,000
____ 21.Under the completed-contract method, how much should Valenzuela recognize as gross profit for 2009?
a.
b.
c.
d.
P0
P30,000
P40,000
P90,000
____ 22. Under the percentage-of-completion method, how much should Valenzuela recognize as gross profit for 2009?
a. P0
b. P40,000
c. P80,000
d. P100,000
____ 23. Violet Construction Company uses the percentage-of-completion method for long-term construction contracts. The
company started a project with a contract price of P2,750 in 2009. Given the following data, what is the balance in
Construction in Progress for this contract at the end of 2009?
Costs incurred this year ..................

Total estimated costs remaining at end
of year .................................
a.
b.
c.
d.
2009
P 400
2010
P 500
1,600
1,000
P150
P400
P550
P1,750
____ 24. Silver Construction Company uses the percentage-of-completion method for long-term construction contracts. The
company has a project with a contract price of P7,000 on which P600 of gross profit has been recognized in prior
years. Information for the current year is as follows:
Total cost incurred through current year ...............

Estimated costs remaining at end of current year .......
P5,000
2,800
What is the loss that Silver should recognize in the current year?
a.
b.
c.
d.
P600
P800
P1,400
No loss should be recognized.
____ 25. In 2009, Konstrak Corp. began construction work under a three-year contract. The contract price is P800,000.
Konstrak used the percentage-of-completion method for financial accounting purposes. The income to be recognized
each year is based on the proportion of costs incurred to total estimated costs for completing the contract. The
financial presentations relating to this contract at December 31, 2009, appear below.
Balance Sheet
Accounts receivable--construction contract
billings ..................................
Construction in progress ....................
Less contract billings ......................
Cost of uncompleted contract in excess of
P15,000
P50,000
(47,000)
billings ..................................
Income Statement
Income (before tax) on the contract
recognized in year 1 ......................
How much cash was collected in 2009 on this contract?
a.
b.
c.
d.
P32,000
P35,000
P47,000
P50,000
3,000
P10,000
Answers
1. D
2. C
3. D
4. B
5. C
6. D
7. C
8. D
9. C
10. B
11. A
12. D
13. C
14. C
15. B
16. C
17. A
18. D
19. B
20. B
21. A
22. B
23. C
MULTIPLE CHOICE
24. C
25. A
PROBLEM 2
(1)
2009
Construction in Progress ....................
Materials, Cash, etc. .....................
750,000
Accounts Receivable .........................

Progress Billings on Construction Contracts
570,000
Cash ........................................
Accounts Receivable .......................
450,000
750,000
570,000
450,000
2010
2,700,000

3,600,000
Cash ........................................
3,300,000
2,700,000
3,600,000
3,300,000
2011
630,000

930,000
Cash ........................................
1,350,000
Progress Billings on Construction Contracts .

Revenue from Long-Term Construction
Contracts .................................
5,100,000
Cost of Long-Term Construction Contracts ....

Construction in Progress ..................
4,080,000
630,000
930,000
1,350,000
5,100,000
4,080,000
(2)
2009

750,000

570,000
Cash ........................................
450,000

Contracts .................................
750,000
270,000
750,000
570,000
450,000
1,020,000
2010
2,700,000

3,600,000
Cash ........................................
3,300,000

Contracts .................................
2,700,000
360,000
2011
2,700,000
3,600,000
3,300,000
3,060,000

630,000

930,000
Cash ........................................
1,350,000

Contracts .................................
630,000
390,000
630,000
930,000
1,350,000
1,020,000

5,100,000
5,100,000
PROBLEM 3
2009

9,000,000

11,000,000
Cash ........................................
7,500,000

Construction in Progress
(P9,000,000 / P19,000,000) P2,000,000 ...
Contracts .................................
9,000,000
9,000,000
11,000,000
7,500,000
947,368
9,947,368
2010
9,500,000

8,000,000
Cash ........................................
9,000,000

Construction in Progress (P21,000,000 P18,500,000 total costs) - P947,368 ........
Contracts .................................
9,500,000
2011
9,500,000
8,000,000
9,000,000
1,552,632
11,052,632

2,000,000
Cash ........................................
4,500,000
21,000,000
2,000,000
4,500,000
21,000,000
PROBLEM 4
(1)
Using the completed-contract method, no gross profit is recognized on the contract until the bridge is completed.
Thus, no entry is needed.
(2)
Cost of Long-Term Construction Contracts ...
Construction in Progress ...................
Contracts..................................
P1,800,000 / 30% = P6,000,000
P7,500,000 - P6,000,000 = P1,500,000
1,800,000
450,000 *
2,250,000
P1,500,000 30% = P450,000
PROBLEM 5
(1)
Progress billings on construction contract ............

Less accounts receivable ..............................
Cash collected in 2009 ................................
P562,000
150,500
P411,500
(2)
Gross profit from construction contract + Construction in progress = Revenue
for 2009
P301,000 + P602,000 = P903,000
P903,000/P7,525,000 = 12%
Percentage completed in 2009
P301,000/.12 = P2,508,333
Estimated income on construction contract
PROBLEM 6
2009
2010
2011
Contract price ...................

Current year costs ...............
Costs to date ....................
Estimated cost to complete .......
Estimated total cost .............
Estimated total gross profit .....
P250,000
110,000
110,000
100,000
210,000
40,000
P250,000
115,000
225,000
20,000
245,000
5,000
P250,000
15,000
240,000
0
240,000
10,000
Percent complete .................

Revenue to date ..................
52%
P130,000
92%
P230,000
100%
P250,000
To Date
at Dec. 31
Previous
Years
2009:
Revenue ............
Costs ............
P130,000
110,000
Current
Year
P130,000
110,000
Gross profit ............
P 20,000
2010:
Revenue ............
Costs ............
P230,000
225,000
P 5,000
P130,000
110,000
P 20,000
P100,000
115,000
P(15,000)
2011:
Revenue ............
Costs ............
P250,000
240,000
P 10,000
P230,000
225,000
P 5,000
P 20,000
15,000
P 5,000
2009
1.
2.
3.
4.
Revenue recognized during

the year ....................
Gross profit recognized during
the year ....................
Balance in the construction in
progress account at Dec. 31 .
Balance in the progress
billings account at Dec. 31 .
P130,000
P 20,000
2010
P100,000
2011
P20,000
20,000
(15,000)
5,000
130,000
230,000
125,000
250,000
PROBLEM 7
Contract price
Current year costs
Costs to date
Estimated cost to complete
Estimated total cost
Estimated total gross profit
Percent complete
Revenue to date
2009
2010
2011
P250,000
150,000
150,000
90,000
240,000
10,000
P250,000
100,000
250,000
20,000
270,000
(20,000)
P250,000
15,000
265,000
0
265,000
(15,000)
63%
93%
P157,500
P232,500
P250,000
Previous
Years
Current
Year
To Date
at Dec. 31
100%
2009:
Revenue ............
Costs ............
P157,500
150,000
P 7,500
P157,500
150,000
P 7,500
2010:
Revenue ............
Costs ............
P232,500
252,500
P(20,000)
P157,500
150,000
P 7,500
P 75,000
102,500
P(27,500)
2011:
Revenue ............
P250,000
P232,500
P 17,500
Costs ............
1. Construction costs (expense)

recognized during the year
265,000
P(15,000)
252,500
P(20,000)
2009
2010
P150,000
P102,500
12,500
5,000
2011
P12,500

the year
7,500

progress account at Dec. 31
(after closing entries)
157,500
230,000
4. Balance in accounts receivable

at Dec. 31 (after closing
entries)
10,000
10,000
---
(27,500)
5,000

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LONG-TERM CONSTRUCTION CONTRACTS

LONG-TERM CONSTRUCTION CONTRACTS

cash collected in 2009.

Actual costs incurred ...........

1. Revenue recognized during the

Actual costs incurred ............

1. Construction costs (expense)

LONG-TERM CONSTRUCTION CONTRACTS

a. Progress Billings as income, Construction in Progress as inventory.

Cumulative actual costs incurred only.

Cumulative actual costs incurred only.

a. as a long-term receivable in the noncurrent assets section of the balance sheet.

a. a contractor is involved in numerous projects.

is more conservative than the completed-contract method.

The cost of the contract has increased.

the same balances each period in the Progress Billings account.

be included in the calculation of the income recognized in the second year.

Progress billings .....................................

Costs incurred ........................................

How much loss should Caloocan have recognized in 2009?

Gross profit recognized at December 31, 2009 ..........

current asset of P200,000.

Costs incurred during the year ............

End of year estimated cost to

Total contract price ..................................

Costs incurred this year ..................

Total cost incurred through current year ...............

LONG-TERM CONSTRUCTION CONTRACTS

Accounts Receivable .........................

Accounts Receivable .........................

Accounts Receivable .........................

Progress Billings on Construction Contracts .

Cost of Long-Term Construction Contracts ....

Construction in Progress ....................

Accounts Receivable .........................

Cost of Long-Term Construction Contracts ....

Accounts Receivable .........................

Cost of Long-Term Construction Contracts ....

Construction in Progress ....................

Accounts Receivable .........................

Cost of Long-Term Construction Contracts ....

Progress Billings on Construction Contracts .

Construction in Progress ....................

Accounts Receivable .........................

Cost of Long-Term Construction Contracts ....

Accounts Receivable .........................

Cost of Long-Term Construction Contracts ....

Accounts Receivable .........................

Progress Billings on Construction Contracts .

Construction in Progress ..................

P1,500,000 30% = P450,000

Progress billings on construction contract ............

Contract price ...................

Percent complete .................

Gross profit ............

Revenue recognized during

1. Construction costs (expense)

2. Gross profit recognized during

3. Balance in the construction in

4. Balance in accounts receivable

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