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Problems Long Term Const Contracts

This document discusses different methods for accounting for long-term construction contracts, including the percentage of completion and cost recovery methods. It provides examples of applying each method to sample construction projects over multiple years, showing the calculation of percentage of completion based on costs incurred to date. Journal entries are presented for recording the accounting transactions under each method.

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Jane Dizon
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86 views17 pages

Problems Long Term Const Contracts

This document discusses different methods for accounting for long-term construction contracts, including the percentage of completion and cost recovery methods. It provides examples of applying each method to sample construction projects over multiple years, showing the calculation of percentage of completion based on costs incurred to date. Journal entries are presented for recording the accounting transactions under each method.

Uploaded by

Jane Dizon
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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CAHPTER 10 - LONG-TERM CONSTRUCTION CONTRACTS

Problem 6 - Methods of Construction Accounting

1.) Percentage of Completion


a.) Input Measure - Percentage of Completion (Cost-to-cost)
20x4 20x5
Contract Price 1,800,000.00 1,800,000.00
Actual Cost Incurred to date 450,000.00 1,550,000.00
Est. Cost to Complete 1,200,000.00 -
Total Estimated Cost at Completion 1,650,000.00 1,550,000.00
Est. Total Gross Profit 150,000.00 250,000.00
Multiply by %age of Completion 27.27% 100%
Gross Profit Earned to date 40,905.00 250,000.00
Less: Gross Profit earned In prior Year - 40,905.00
Gross Profit Earned This year 40,905.00 209,095.00

b.) Input Measure - Cost Recovery Method


20x4 20x5
Constrcution Revenue 450,000.00 1,350,000.00
Cost Incurred 450,000.00 1,100,000.00
Gross Profit - 250,000.00
Percentage of Completion = Cost incurred to date
Total Estimate Costs at completion

20x4 = 450,000.00 = 27.27%


1,650,000.00

20x5 = 1,550,000.00 = 100%


1,550,000.00
CAHPTER 10 - LONG-TERM CONSTRUCTION CONTRACTS

Problem 7 - Methods of Construction Accounting


1.) Percentage of Completion
Input Measure - Percentage of Completion (Cost-to-cost)
20x4 20x5 20x6
Contract Price 108,000,000.00 108,000,000.00 108,000,000.00
Actual Cost Incurred each Year 30,000,000.00 45,000,000.00 35,000,000.00
Add: Costs Incurred in Prior Year(s) - 30,000,000.00 75,000,000.00
Total Costs Incurred to date 30,000,000.00 75,000,000.00 110,000,000.00
Est. Cost to Complete 60,000,000.00 45,000,000.00 -
Total Estimated Cost at Completion 90,000,000.00 120,000,000.00 110,000,000.00
Est. Total Gross Profit (Loss) 18,000,000.00 (12,000,000.00) (2,000,000.00)
Multiply by %age of Completion 33.33% 100% 100%
Est Gross Profit (Loss)Earned to date 6,000,000.00 (12,000,000.00) (2,000,000.00)
Less: GP (Loss) earned In prior Year - 6,000,000.00 (12,000,000.00)
Gross Profit (Loss) Earned This year 6,000,000.00 (18,000,000.00) 10,000,000.00

2.) Zero Profit - Cost Recovery Method


20x4 20x5 20x6
Constrcution Revenue 30,000,000.00 33,000,000.00 45,000,000.00
Cost Incurred each year 30,000,000.00 45,000,000.00 35,000,000.00
Gross Profit (Loss) - (12,000,000.00) 10,000,000.00
Percentage of Completion = Cost incurred to date
Total Estimate Costs at completion

20x4 = 30,000,000.00 = 33 1/3%


90,000,000.00

20x5 = 75,000,000.00 = 62.50%


120,000,000.00

Equals Costs incurred less anticipated loss


CAHPTER 10 - LONG-TERM CONSTRUCTION CONTRACTS

Problem 8 - Methods of Construction Accounting


1.) Percentage of Completion

Percentage of Completion = Cost incurred to date


Total Estimate Costs at completion

20x3 = 126,048.00 = 26.00%


484,800.00

20x4 = 370,080 - 6,000 = 74.00%


492,000.00

JOURNAL ENTRIES
a.) Input Measure - Percentage of Completion (Cost-to-cost) Const in Progress
20x3 20x4 20x5 Materials Inventor
Initial Contract Price 528,000.00 528,000.00 528,000.00
Variation - 12,000.00 12,000.00
Total Contract Price 528,000.00 540,000.00 540,000.00 Accts Receivable
Actual Cost Incurred each year 126,048.00 238,032.00 127,920.00
Add: Costs Incurred in Prior Year(s) - 126,048.00 364,080.00
Total Costs Incurred to date 126,048.00 364,080.00 492,000.00 Cash
Est. Cost to Complete 358,752.00 253,968.00 -
Total Estimated Cost at Completion 484,800.00 492,000.00 492,000.00
Est. Total Gross Profit 43,200.00 48,000.00 48,000.00 Construction Costs
Multiply by %age of Completion 26.00% 74% 100% Const in Progress
Gross Profit Earned to date 11,232.00 35,520.00 48,000.00
Less: Gross Profit earned In prior Year(s) - 11,232.00 35,520.00
Gross Profit Earned This year 11,232.00 24,288.00 12,480.00 Contract Billings

b.) Input Measure - Cost Recovery Method


20x3 20x4 20x5 JOURNAL ENTRIES
Constrcution Revenue 126,048.00 238,032.00 175,920.00 Const in Progress
Cost Incurred each year 126,048.00 238,032.00 127,920.00 Materials Inventor
Gross Profit - - 48,000.00

Accts Receivable

Cash
Construction Costs
Const in Progress

Contract Billings

Computation of Due to and Due from Customers

a.) Input Measure - Percentage of Completion (Cost-to-cost)


20x3 20x4 20x5
Construction in Progress 137,280.00 399,600.00 540,000.00 Nota Bene:
Contract Billings 144,000.00 384,000.00 540,000.00 1.)
Contract Asset or Liability (6,720.00) 15,600.00 -
Liability Asset 2.)

b.) Input Measure - Cost Recovery Method


20x3 20x4 20x5
Construction in Progress 126,048.00 364,080.00 540,000.00
Contract Billings 144,000.00 384,000.00 540,000.00
Contract Asset or Liability (17,952.00) (19,920.00) -
Liability Liability
JOURNAL ENTRIES: 20x3 20x4 20x5
Const in Progress 126,048.00 238,032.00 127,920.00
Materials Inventory - 6,000.00
Cash/AP 126,048.00 244,032.00

Accts Receivable 144,000.00 240,000.00 156,000.00


Contract Billings 144,000.00 240,000.00

120,000.00 228,000.00 192,000.00


Accts Receivable 120,000.00 228,000.00

Construction Costs 126,048.00 238,032.00 127,920.00


Const in Progress 11,232.00 24,288.00 12,480.00
Construction Revenue 137,280.00 262,320.00

Contract Billings - - 540,000.00


C0nst in Progress - -

JOURNAL ENTRIES: 20x3 20x4 20x5


Const in Progress 126,048.00 238,032.00 127,920.00
Materials Inventory - 6,000.00
Cash/AP 126,048.00 244,032.00

Accts Receivable 144,000.00 240,000.00 156,000.00


Contract Billings 144,000.00 240,000.00

120,000.00 228,000.00 192,000.00


Accts Receivable 120,000.00 228,000.00
Construction Costs 126,048.00 238,032.00 127,920.00
Const in Progress - - 48,000.00
Construction Revenue 126,048.00 238,032.00

Contract Billings - - 540,000.00


C0nst in Progress - -

Nota Bene:
The Difference between the CIP and CB is a Contract Asset when CIP is greater than CB account.

The Difference between the CIP and CB is a Contract Liability when CB is greater than CIP account.
20x5

6,000.00
121,920.00

156,000.00

192,000.00

140,400.00

540,000.00

20x5

6,000.00
121,920.00

156,000.00

192,000.00
175,920.00

540,000.00
CAHPTER 10 - LONG-TERM CONSTRUCTION CONTRACTS

Problem 9 - Methods of Construction Accounting - Estimated Gross Loss

1.) Percentage of Completion


Percentage of Completion = Cost incurred to date
Total Estimate Costs at completion

20x4 = 1,500,000.00 = 55.56%


2,700,000.00

20x5 = 2,800,000.00 = 100.00%


2,800,000.00

a.) Input Measure - Percentage of Completion (Cost-to-cost) JOURNAL ENTRIES:


20x4 20x5 Const in Progress
Contract Price 2,500,000.00 2,500,000.00
Actual Cost Incurred each year 1,500,000.00 1,300,000.00
Add: Costs Incurred in prior year - 1,500,000.00 Accts Receivable
Costs Icurred to Date 1,500,000.00 2,800,000.00
Est. Cost to Complete 1,200,000.00 -
Total Estimated Cost at Completion 2,700,000.00 2,800,000.00 Cash
Est. Total Gross Loss (200,000.00) (300,000.00)
Multiply by %age of Completion 100.00% 100.00%
Est Gross Loss Recognized to date (200,000.00) (300,000.00) Construction Costs
Less: Gross Loss In prior Year - (200,000.00)
Gross Loss Recognized This year (200,000.00) (100,000.00)

Contract Billings

b.) Input Measure - Cost Recovery Method


20x4 20x5 JOURNAL ENTRIES:
Constrcution Revenue 1,300,000.00 1,200,000.00 Const in Progress
Cost Incurred to date 1,500,000.00 1,300,000.00
Gross Loss Recognized This year (200,000.00) (100,000.00)
Accts Receivable

Cash
Construction Costs

Contract Billings

Computation of Due to and Due from Customers

a.) Input Measure - Percentage of Completion (Cost-to-cost)


20x4 20x5
Construction in Progress 1,300,000.00 2,500,000.00 Nota Bene:
Contract Billings 1,200,000.00 2,500,000.00 1.)
Contract Asset or Liability 100,000.00 -
Asset 2.)

b.) Input Measure - Cost Recovery Method Note further:


20x4 20x5
Construction in Progress 1,300,000.00 2,500,000.00
Contract Billings 1,200,000.00 2,500,000.00
Contract Asset or Liability 100,000.00 -
Asset
JOURNAL ENTRIES: 20x4 20x5
Const in Progress 1,500,000.00 1,300,000.00
Cash/AP 1,500,000.00 1,300,000.00

Accts Receivable 1,200,000.00 1,300,000.00


Contract Billings 1,200,000.00 1,300,000.00

1,000,000.00 1,500,000.00
Accts Receivable 1,000,000.00 1,500,000.00

Construction Costs 1,500,000.00 1,300,000.00


Const in Progress 200,000.00 100,000.00
Construction Revenue 1,300,000.00 1,200,000.00

Contract Billings - 2,500,000.00


C0nst in Progress - 2,500,000.00

JOURNAL ENTRIES: 20x4 20x5


Const in Progress 1,500,000.00 1,300,000.00
Cash/AP 1,500,000.00 1,300,000.00

Accts Receivable 1,200,000.00 1,300,000.00


Contract Billings 1,200,000.00 1,300,000.00

1,000,000.00 1,500,000.00
Accts Receivable 1,000,000.00 1,500,000.00
Construction Costs 1,500,000.00 1,300,000.00
Const in Progress 200,000.00 100,000.00
Construction Revenue 1,300,000.00 1,200,000.00

Contract Billings - 2,500,000.00


C0nst in Progress - 2,500,000.00

Nota Bene:
The Difference between the CIP and CB is a Contract Asset when CIP is greater than CB account.

The Difference between the CIP and CB is a Contract Liability when CB is greater than CIP account.

Note further:
Observe that, under both methods, in case of anticipated contract losses,
the CIP account would be the same.
CIP account.
CAHPTER 10 - LONG-TERM CONSTRUCTION CONTRACTS

Problem 10 - Incomplete Data

1.) P50.0M - Construction in Progress is the total of Costs and GP. So if the CIP per Balance sheet is P50.00M, so is

2.) Accounts Receivable, per Balance Sheet 14,000,000.00


Cash Collections 46,000,000.00
Contract Billings to date 60,000,000.00

3.) Contract Billings 60,000,000.00


Construction in Progress 50,000,000.00
Net Excess of Construction 10,000,000.00 Contract Liability

4.) Percentage of Completion = 50.00M Alternative way to compute for %age of completion w
150.00M costs is not given in the problem.

= 33.33%
sheet is P50.00M, so is the Revenue.

or %age of completion when total estimated

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