INTEGRATION: ADVANCED FINANCIAL ACCOUNTING AND REPORTING

LONG-TERM CONSTRUCTION CONTRACTS

PROBLEM 1
On January 1, 2021, HIJ Co. entered a long-term construction contract with a fixed consideration of P 17,500,000. The
entity billed its client as follows: 40% during 2021, 25% during 2022 and 35% at the year of project completion. The
following data were provided by the cost accountant of HIJ Co. :
2021 2022 2023
Cost incurred 7,700,000 4,900,000 4,200,000
Estimated remaining cost to complete 11,550,000 3,150,000 -

1. Under IFRS 15, compute the construction in progress, net on December 31, 2022.

2. Assume that an architect hired by the company made the following estimates of the project's percentage of
completion at 35%, 70% and 100% at the end of 2021, 2022, and 2023, respectively, compute the realized gross
profit for 2022, using percentage of completion method — output measures as determined by estimates made by
the architect

PROBLEM 2
The following are the contract revenues and costs transactions of DEF Construction Corporation as of December 31, 2021.
The project duration is from June 1, 2021 until August 2022 with a total contract cost of P10M. It was agreed further that
the initial contract be revised with an increase by 15%.

Revenues:
Initial amount of contract 14,000,000
Additional incentives 400,000
Other contract claims 100,000
Incidental income directly related to the project 40,000

Costs and expenses:

Direct labor 2,000,000
Costs of materials 4,000,000
Depreciation of plant equipment 600,000
Contract design and technical assistance 300,000
Administrative expenses 200,000
Selling expenses 50,000

Under IFRS 15, compute the amount of revenue recognized for the year ended December 31, 2021

PROBLEM 3
BUILDERS Inc. entered into a long-term construction contract on January 1, 2021 to construct an arena at a fixed contract
price of P35M.
The following are the terms of the contract:
 BUILDERS Inc. bills its customers 60% of the contract price in year one, 15% in year two and 25% at the date of
completion of project.
 A mobilization fee of 8% of the contract price (deductible from the 2022 bill) is payable 10 days after the contract
signing.
 The contract provides that the customer shall pay 90% of the total amount billed, on or before the last working day
of the year subject to retention provision of 20% of amount to be paid by the customer.
The customer satisfactorily complied with the contractual provision. BUILDERS' accountants provide the following data for
the years ended December 31, 2021 and December 31, 2022

December 31, 2021 December 31, 2022

Cost incurred to date 14,000,000 24,500,000
Estimated cost to complete as of this date 31,500,000 14,000,000

Under IFRS 15, compute the 12/31/2022 (1) Due from Customer; (2) Construction in Progress, net; (3) Realized
Gross Profit/(loss)
INTEGRATION: ADVANCED FINANCIAL ACCOUNTING AND REPORTING
LONG-TERM CONSTRUCTION CONTRACTS

PROBLEM 4
On Jan 1, 2019, JDP Corporation started the construction of a building at a fixed contract price of P1,000,000. On the same
date, the customer paid a mobilization fee equal to 5% of contract price that will be deductible from the first billing. The
outcome of contraction contract cannot be estimated reliably

During 2019, the entity billed the customer equivalent to 30% of the contract price. During 2020, the entity billed again the
customer amounting to 20% of the contract price. During 2020, the entity billed again the customer amounting to 40% of
the contract price. The remaining billing was made at year of the completion of the project

The entity made collection from the customer at the end of 2019, 2020 and 2021, in the amount of P120,000, P450,000,
P180,000, respectively. The entity provided the following data concerning the direct cost related to the said project:

2019 2020 2021

Cumulative costs incurred at year-end 360,000 800,000 870,000

Remaining estimated costs to complete at year-end 840,000 250,000 50,000

1. What is the realized gross profit for the year ended Dec 31, 2020?

2. What is the excess of construction in progress over progress billings or (excess of progress billings over
construction in progress) on Dec 31, 2021?

3. What is the balance of accounts receivable on Dec 31, 2021?

PROBLEM 5
On January 1, 2021, Entity XYZ accepted a long-term construction project to construct a building with an initial contract
price of P30,000,000. During 2023, the contract price increases due to the change in the project design requested by the
client. The following data are provided by the accountant and project manager concerning the construction costs for the
three years of construction:
12/31/21 12/31/22 12/31/23
Cost incurred to date 2,500,000 ? 27,000,000
Realized Gross Profit/(loss) ? 875,000 (4,000,000)
Percentage of completion 10% 45% 80%

Under IFRS 15, compute the Construction Cost to be recognized in the Income Statement for the year ended
December 31, 2023.

PROBLEM 6
On January 1, 2022, Dolomite Development Corp (DDC) entered into contract with Company B to construct a new corporate
headquarters owned by Company B. Contractor DDC determines that control of the building is passed to Company B as it
is constructed. Therefore, the performance obligation is satisfied over time. The contract price is P5,000,000 but the amount
will be reduced or increased depending on when construction of the building is completed. For each day before Dec 31,
2024, that the building is completed, the promised consideration will increase by P25,000. For each day after Dec 31, 2024,
that the building is incomplete, the promised consideration will be reduced by P25,000. The parties have also agreed that,
when the building achieves the certification level specified in the contract, Contractor DDC will be entitled to an incentive
bonus of P200,000.

On Dec 31, 2022, DDC determined that the “expected value” better predicts the variable consideration it will receive
regarding the early completion or delay of the construction because of different outcomes possible based on DDC’s current
construction schedule and its experience with past projects. DDC estimates that it is 50% likely to complete the project 10
days ahead of schedule and receive an incentive of P250,000, 25% likely to complete the project on time and receive no
incentive and 25% likely to complete the project five days’ past schedule and incur a P125,000 penalties.

As of the same date, on the other hand, DDC determined that the “most likely amount” is the better predictor to estimate
the variable consideration associated with the green building certification bonus because there are only two possible
outcomes (P200,000 or P0). Based on its history of completing building projects that achieve the green building certification
level specified in the contract and the absence of factors that may indicate the criteria will not be met, DDC decided to
include the bonus in the transaction price.
INTEGRATION: ADVANCED FINANCIAL ACCOUNTING AND REPORTING
LONG-TERM CONSTRUCTION CONTRACTS

On Dec 31, 2023, DDC did not change its estimate with respect to green building certification bonus but after evaluating
construction completed to date and the remaining project schedule, Contractor DDC determines it is now 75% likely to
complete the project 10 days ahead of schedule and receive an incentive of P250,000 and 25% likely to complete the project
on time and receive no incentive bonus.

The following construction costs were provided by DDC for the years ended Dec 31, 2022 and 2023:

2022 2023
Cost incurred during the year 2,400,000 750,000
Estimated remaining cost to complete at the end of the year 1,600,000 1,350,000

Under IFRS 15, assuming the outcome of construction can be estimate reliably, what is the realized gross profit /
(gross loss) to be recognized by DDC for the year ended Dec 31, 2023?