LONG-TERM CONSTRUCTION

Part I: Theory of Accounts

1. It is a contract specifically negotiated for the construction of an asset or a combination of assets that
are closely interrelated or interdependent in terms of their design, technology and function or their
ultimate purpose or use.
A. Construction contract C. Franchise contract
B. Installment contract D. Consignment contract

2. It is a construction contract in which the contractor agrees to a fixed contract price, or a fixed rate per
unit of output, which in some cases is subject to cost escalation clauses.
A. Fixed price contract C. Variable contract
B. Cost plus contract D. Mixed contract

3. It is a construction contract in which the contractor is reimbursed for allowable or otherwise defined
costs, plus a percentage of these costs or a fixed fee.
A. Fixed price contract C. Variable contract
B. Cost plus contract D. Mixed contract

4. Aside from the initial amount of revenue agreed in the long-term construction contract, additional
revenues may be recognized by the contractor (1) to the extent that it is probable that they will result in
revenue and (2) they are capable of being reliably measured. Which of the following will not be
considered as additional contract revenue by a contractor?
A. Variation in contract work as instructed by the customer regarding the scope of work to be
performed.
B. Claim that the contractor may seek to collect from the customer for customer caused delays or
errors in specification or design.
C. Incentive payments to be paid to the contractor if specified performance standards are met or
exceeded or for early completion of the contract.
D. Gain on sale of scrap materials from construction.

5. Which of the following costs shall be excluded in the contract costs of construction contract?
A. Costs that relate directly to the specific contract.
B. Costs that are directly attributable to contract activity in general and can be allocated to the
contract.
C. Such other costs as are specifically chargeable to the customer under the terms of the contract.
D. Selling costs such as advertisement expense or commissions of real estate agents or brokers.

6. The following costs shall be capitalized as part of construction in progress or contract costs, except
A. Costs of hiring and moving of plant and equipment to and from the contract site.
B. Systematically, rationally and consistently allocated construction overheads and borrowing costs.
C. Costs that are specifically chargeable to the customer under the terms of the contract may include
some general administration costs and development costs for which reimbursement is specified in
the terms of the contract.
D. General and research and development costs for which reimbursement is not specified in the
contract.
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7. When it is probable that total contract costs will exceed total contract revenue, how shall it be
accounted for?
A. The expected loss shall be recognized as an expense immediately regardless of the certainty or
uncertainty of the outcome of a construction contract.
B. The expected loss shall be recognized as an expense immediately only when the outcome of a
construction contract cannot be estimated reliably.
C. The expected loss shall be recognized as an expense by reference to the state of completion of
the contract activity at the end of the reporting period when the outcome of a construction
contract cannot be estimated reliably.
D. The expected loss shall be accounted for based on company’s policy.

8. When the company changes its percentage of completion of the construction project every year,
how shall the accounting change be treated?
A. It shall be accounted for as a change in accounting policy treated by retrospective application or
with cumulative effect in the beginning retaining earnings at the date of change.
B. It shall be accounted for as a change in accounting estimate treated by prospective application to
the date of change and future date profit or loss.
C. It shall be accounted for as a prior period error treated by retrospective restatement or with
cumulative effect in the beginning retaining earnings at the date of discovery of error.
D. It shall be accounted for as an equity transaction to be adjusted in the share premium or other
comprehensive income as the case may be.

9. How shall the contructor present in its statement of financial the accounts related to construction
contract?
A. It shall present as an asset the gross amount due from customers for contract work which is the
net amount of cost incurred plus recognized profits less the sum of recognized losses and
progress billings for all contracts in progress for which costs incurred plus recognized profits or
less recognized losses exceeds progress billings. (Meaning: It is presented as an asset if
Construction-in-Progress exceeds Progress Billings)
B. It shall present as a liability the gross amount due to customers for contract work is the net
amount of cost of cost incurred plus recognized profits less the sum of recognized losses and
progress billings for all contracts in progress for which progress billings exceeds costs incurred
plus recognized profits or less recognized losses. (Meaning: It is presented as a liability if
Progress Billings exceeds Construction in Progress)
C. Either A or B but the liabilities and assets resulting from the difference of Construction in
Progress and Progress Billings shall not be netted or offsetted in the Statement of Financial
Position.
D. Both A and B but the liabilities and assets resulting from the difference of Construction in
Progress and Progress Billings shall be netted or offsetted in the Statement of Financial Position

10. Which of the following accounting changes shall be treated retrospectively instead prospectively by
the long-term construction contractor?
A. Change in the construction revenue
B. Change in the estimated costs to complete the contract
C. Change in the estimate of the outcome of the contract
D. Change from percentage of completion to cost recovery method or vice versa
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Part II: Problem Solving

Problem 1. On January 1, 2024, ABC Constructions entered into a long-term construction contract to build
a road upstate to prevent travelers from getting lost. The P13 million project, which spans 22 kilometers,
was completed in three years and all relevant information about the projects are as follows:
For the year 2024 2025 2026
Cost incurred P3,000,000 P5,000,0 P3,000,0
00 00
Estimated cost to complete at year end P7,000,000 P6,000,0 P0
00
Labor hours consumed 28,000 hours 20,000 32,000
hours hours
Value of work done P5,200,000 P3,900,0 P3,900,0
00 00
Kilometers completed 5km 4km 4km

1. Using the cost-to-cost method, how much is the construction in progress, gross as of the year
ended December 31, 2025?
A. 9,100,000 C. 7,428,571
B. 9,000,000 D. 7,000,000

2. Assume a budget of 80,000 hours to complete the project, how much is the realized gross profit for
the year ended December 31, 2024 if the input method based on labor hours was used?
A. 900,000 C. 1,200,000
B. 1,050,000 D. 2.954,545

3. Assuming the company used the output method based on value of the work certified by an expert,
how much is the realized gross profit for the year ended December 31, 2024?
A. 900,000 C. 1,200,000
B. 1,050,000 D. 2.954,545

Problem 2. The following are the contract revenues and costs transactions of DEF Construction
Corporation as of December 31, 2024. The project duration is from June 1, 2024 until August 2025
with a total contract cost of P10,000,000 . It was agreed further that the initial contract be revised with
an increase by 15%.
Revenues:
Initial amount of contract P14,000,00
Additional incentives 0
400,000
Other contract claims 100,000
Incidental income directly related to the project 40,000
Costs and expenses:
Direct labor P2,000,000
Costs of materials 4,000,000
Depreciation of plant equipment used in construction 600,000
Contract design and technical assistance 300,000
Administrative expenses 200,000
Selling expenses 50,000

Under IFRS15, compute the amount of revenue recognized for the year ended December 31, 2024
A. 11,454,000
B. 11,387,600
C. 11,438,364
D. 10,500,000
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Problem 3. On January 1, 2023, ABC Corp. entered into a construction contract and the contract had the
following provisions:

 The total contract price is P16,000,000.

 A mobilization fee equivalent to 6.25% of the total contract price is due 1 week from contract
signing, deductible at completion of project.
 Half of the contract price will be billed by the end of 2023, 20% of the total contract price by the
end of 2024, and the remaining 30% balance at project completion.
 Retention provision of 10% on all billings.

After the first year of construction, P4,000,000 construction costs were incurred, which was equivalent to
40% of the total estimated cost to complete the project. After the second year, an additional P5,000,000
construction costs were incurred, for a total of 75% completion estimate using the cost-to-cost method.

1. How much was collected from the customer in 2023?

A. 7,200,000
B. 8,000,000
C. 8,100,000
D. 8,200,000

2. How much is the Excess CIP / (Excess Billings) as of December 31, 2024?
A. 800,000 contract asset
B. 1,600,000 contract liability
C. 2,400,000 contract asset
D. 5,600,000 contract liability

3. How much is the construction revenue for the year ended December 31, 2024?
A. 5,600,000
B. 6,400,000
C. 12,000,000
D. 16,000,000

Problem 4. On January 1, 2024, Entity XYZ accepted a long-term construction project to construct a
building with an initial contract price of P30,000,000. During 2026, 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:
Year 12/31/2 12/31/ 12/31/2
024 20 026
25
Costs incurred to date P2,500, ? P27,000
000 ,000
Realized gross profit/(loss) ? P875, (P4,000
00 ,000
0 )
Percentage of completion as of the end of the year 10% 45% 80%

Under IFRS 15, compute the Construction Cost of Sales to be recognized in the Income Statement for
the year ended December 31, 2026
A. 15,400,000
B. 13,800,000
C. 11,812,500
D. 14,875,000
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Problem 5. On January 1, 2024, Entity QRS started the construction of a coliseum with a fixed contract price of
P40,000,000. The following data are provided by the accountant and project manager concerning the
construction costs for the three years of construction:

Year 12/31/20 12/31/2 12/31/2

24 025 026
Costs incurred ? ? P14,840
,00
0
Realized gross profit/(loss) P3,000,0 (P1,000 (P3,200,
00 ,00 000
0) )
Percentage of completion as of the end of the year 25% 40% ?
Under IFRS 15, compute the balance of the Inventory account on December 31, 2026
A. 28,000,000 C. 27,120,000
B. 27,640,000 D. 28,840,000
Problem 6. On January 1, 2024, ABC Corporation entered into a contract with Company LMN to construct a
new warehouse on land owned by Company LMN. The contractor determines that control of the warehouse is
passed to Company LMN as it is constructed. The fixed consideration is P17,500,000, but that amount will be
decreased or increased depending on when construction of the warehouse is completed.
The following are the relevant information:

● For each day before December 31, 2026, that the warehouse is completed, the promised consideration will
increase by P90,000. For each day after December 31, 2026 that the warehouse is incomplete, the promised
consideration will be decreased by P150,000.
● The parties also agreed that upon completion of the warehouse, it will be inspected and assigned an ISO
certification level. If the warehouse achieves the certification level specified in the contract, the contractor
will be entitled to an incentive bonus of P500,000.
● On December 31, 2024, ABC determined that the “expected value” better predicts the variable consideration
it will receive regarding the early completion or delay of the construction because of the different outcomes
possible. ABC estimates that it is 60% likely to complete the project 10 days ahead of schedule and receive
an incentive, 25% likely to complete the project on time and 15% likely to complete the project five days
past schedule and incur a penalty.
● On the other hand, ABC determined that the “most likely amount” is the better predictor to estimate the
variable consideration associated with the ISO certification bonus. Based on its history of completing similar
projects that achieve the ISO certification level specified in the contract and the absence of factors that may
indicate the criteria will not be met, ABC decided to include the bonus in the transaction price.
● On December 31, 2025, ABC did not change its estimate with respect to the ISO certification bonus but after
evaluating the construction completed to date and the remaining project schedule, the contractor determined
it is now 80% likely to complete the project 10 days ahead of schedule, 15% likely to complete the project
on time and 5% likely to complete the project five days past schedule and incur a penalty.
The following construction costs were provided by ABC for the years ended December 31, 2024 and 2025:
December 31, December 31,
2024 2025
Costs incurred during the year P7,700,000 P5,845,000
Estimated costs to complete at the end of the year P6,300,000 P1,505,000

Under IFRS 15, compute the realized gross profit/(loss) to be recognized by ABC for the year ended
December 31, 2025
A. 872,550 C. (805,000)
B. 834,125 D. (772,188)
END