ADVANCED FINANCIAL ACCOUNTING AND REPORTING REVENUE RECOGNITION – CONSTRUCTION CONTRACTS

TWO BASIC METHODS OF COMPUTATION AND RECOGNITION OF CONSTRUCTION REVENUE

A. GIVEN: Contract Price P5 million
Total estimated cost P4.5 million
2016 2017 2018 Total
Cost incurred each year P1.35 million P2.25 million P0.4 million P4 million
Estimated cost to complete 3.15 million 0.40 million --- ---
Progress billings 0.40 million 2.00 million 2.60 million 5.0 million
Collections 0.275 million 2.10 million balance 5.0 million

1. Determine the amount of income that the company should recognize in 2016, 2017 and 2018 under the percentage of
completion method.
2. Determine the amount of income that the company should recognize in 2016, 2017 and 2018 under the zero profit method.
3. Prepare the journal entries required at the end of each year to recognize the year’s income under the
a. Percentage of completion method
b. Zero profit method
4. Balances of related accounts as of Jan. 1, 2018. (Financial statement presentation)

ANTICIPATED LOSSES ON LONG TERM CONTRUCTION PROJECTS

CASE 1: Loss in the year of revision of estimated costs but profit in total contract.
Using the same data given above, assume that at the end of 2017, the estimated cost to complete was increased to P1.26
million and this was the actual cost incurred in 2018.
1. Determine the amount of gross profit (loss) to be recognized each year.
2. Entries to record revenue and costs for the 3 years under the percentage of completion method.
3. Entries to record revenue and costs for the 3 years under the zero profit method.

CASE 2: Loss in the year of revision of total estimated costs but overall loss on the contract.
Using the same date given in A above, except that in 2017 the estimated cost to complete were P1.5 million instead of
P400,000, assume also that actual cost equaled expected cost in 2018.
1. Determine the amount of gross profit (loss) to be recognized each year.
2. Entries to record revenue and costs for the 3 years under the zero profit method.
3. Entries to record revenue and costs for the 3 years under the percentage of completion method.