Illustration 1: Fixed price contract

The following information relates to a fixed price contract of Bolin

Company:
Contract price 100,000
Costs to date 48,000
Total estimated costs 80,000

What is the amount of gross profit to be recognized in the Statement of

Comprehensive Income for the current year?

Answer and solution:

The amounts to be recognized in the Statement of Comprehensive Income
are:
Revenue (60% * 100k) 60,000
Less: Costs / Expenses (60% * 80k) 48,000
Gross profit (60% * 20K) 12,000

Percentage of completion calculation: 48k / 80k = 60%

Illustration 2: Cost plus contract

The following information relates to a cost-plus contract, with agreed profit

of 20% as percentage of costs, obtained by Mako Corp. on December 31::
20x3 20x4
Cumulative costs incurred on
work to date 100,000 150,000

What is the amount of gross profit to be recognized in 20x3 and 20x4?

Answer and solution:

To prepare the statement of comprehensive income for each of the two years,
the business calculates the costs incurred, assesses the profit that should be
recognized and insert recognized in profit or loss.
20x3
Revenue [Cost 100k plus (20% * 100K)] 120,000
Less: Costs/Expenses (given) 100,000
Gross profit (20% * 100k) 20,000

20x4
Revenue [Cost of 50k plus (20% * 50K)] 60,000
Less: Costs/Expenses (given) 50,000
Gross profit (20% * 50k) 10,000
 Illustration 3: Input measures

Asami Case 1: Asami Builders has fixed price contract to build a waiting
shed. The initial amount of revenue agreed is P440,000. At the beginning of
the contract on January 1, 20x3, the initial estimate of the construction cost
is P400,000. By the end of 20x3, the estimate of the total costs has risen to
P404,000

During 20x4, the customer agrees to a variation with increases expected

revenue from the contract by P10,000 and causes additional costs of
P6,000. At the end of 20x4 there are materials stored on site for use which
cost P5,000 during the period.

Asami Builders has decided to determine the stage of completion of the

contract by calculating the proportion that contract costs incurred for work
to date bear to the latest estimated total contract costs. The contract costs
incurred at the end of each year (costs incurred to date), billings and
collections for each year were as follows:

20x3 20x4 20x5

Direct and allocable costs to
date 105,040 *308,400 410,000
Billings 120,000 200,000 130,000
Collections 100,000 190,000 160,000
*including materials in store

Answer and solution:

20x3 20x4 20x5
Contract Price
Initial amount 440,000 440,000 440,000
Variations - 10,000 10,000
Total Contract Price (1) 440,000 450,000 450,000
Costs incurred each year 105,040 203,360 106,600
Add: Costs incurred in prior
years - 105,040 303,400
Actual costs incurred to date (2) 105,040 *303,400 410,000
Add: Estimated costs to
complete †298,960 †106,600 -
Total Estimated Costs (3) 404,000 ‡410,000 ‡410,000
Estimated Gross Profit (1-3) 36,000 40,000 40,000
Percentage of Completion (2/3) 26% 74% 100%
Gross Profit to date 9,360 29,600 40,000
Less: Gross profit prior years - 9,360 29,600
Gross profit current year 9,360 20,240 10,400
*Exclude costs relating to future activity (5,000 materials in store but not yet used)
†Squeezed
‡Including 6,000 additional costs 20x4

Notes:
1. Changes in Estimates. The increase in cost of 6,000 as a result of
variation in contract is accounted for as a change in estimate, thus,
under PAS 8 Accounting Policies, the catch-up adjustments are made
in the year of change.
Entries for 20x3 to 20x5
20x3 20x4 20x5
Construction in Progress 105,040 198,360 106,600
Materials Inventory 5,000 5,000
Cash, payables, etc. 105,040 203,360 101,600
To record costs incurred

Accounts receivable 120,000 200,000 130,000

Progress billings 120,000 200,000 130,000
To record progress
billings

Cash 100,000 190,000 160,000

Accounts receivable 100,000 190,000 160,000
To record collections

Construction Expenses 105,040 198,360 106,600

Construction in Progress 9,360 20,240 10,400
Revenue from Construction 114,400 218,600 117,000
To recognize gross profit

Progress billings 450,000

Construction in Progress 450,000
To close construction in
progress and progress billing
accounts

Alternatively,
20x3 20x4 20x5
Contract Account 105,040 198,360 106,600
Materials Inventory 5,000 5,000
Cash, payables, etc. 105,040 203,360 101,600
To record costs incurred

Accounts receivable 120,000 200,000 130,000

Contract Account 120,000 200,000 130,000
To record progress billings

Cash 100,000 190,000 160,000

 Accounts receivable 100,000 190,000 160,000
To record collections

Construction Expenses 105,040 198,360 106,600

Contract Account 9,360 20,240 10,400
Revenue from Construction 114,400 218,600 117,000
To recognize gross profit

Note: no need to for the last entry (Dr PB, Cr CIP because you are using same
account, hence, it will zero out on its own).
Financial Statement Presentation
Balance sheet
20x3 20x4 20x5
Current Assets:
Accounts receivable 20,000 30,000 -
Contract asset:
Construction in Progress 333,000
Less: Progress Billings 320,000
Contract asset 13,000
Raw materials inventory 5,000

Current Liability:
Contract Liability:
Progress Billings 120,000
Less: Construction in Progress 114,400
Contract liability 5,600

Income statement
20x3 20x4 20x5
Revenue 114,400 218,600 117,000
Less: Costs/Expenses 105,040 198,360 106,600
Gross profit 9,360 20,240 10,400
T-Accounts

Construction in Progress Billings

Progress
20x3 C 105,040 120,000 20x3
GP 9,360
end of x3 114,400 120,000 end of x3
20x4 C 198,360 200,000 20x4
GP 20,240
end of x4 333,000 320,000 end of x4
20x5 C 106,600 130,000 20x5
GP 10,400
end of x5 450,000 450,000 450,000 450,000
Illustration 4: Output measures

On January 1, 20x5, Naga enters into a contract with a customer to

construct a building for consideration of P P10,000,000. The contract is
expected to take two (2) years to complete.

On December 31, 20x5, Naga has incurred costs of P2,400,000. Costs to

complete are P2,000,000. In addition to these costs, Naga purchased plant
to be used on the contract at a cost of P1,600,000. This plant was purchased
on January 1, 20x5 and will have no residual value at the end of the two (2)
year contract. Depreciation on the plant is to be allocated on a straight-line
basis across the contract.

On December 31, 20x5, the value of the work certified was P4,500,000 and
the customer had paid P1,140,000. Naga measures progress on contract
using an output method, based on the value of work certified to date.

Answer and solution:

Gross Profit Total 20x5 20x6
Computation
Revenue 10,000,000
Costs/Expenses 6,000,000
Estimated Gross Profit 4,000,000  4,000,000  4,000,000
Percentage of
Completion 45% 100%
Gross Profit to date 1,800,000 4,000,000
Less: Gross profit prior
years - 1,800,000
Gross profit current year 1,800,000 2,200,000
*2,400,000 cost incurred + 1,600,000 plant asset depreciation + 2,000,000 est.
cost to complete
Entries to record:
20x5 20x6
Construction in Progress 3,200,000 2,800,000
Cash, payables, etc. 2,400,000 2,000,000
Depreciation Expense 800,000 800,000
To record costs incurred

Accounts receivable 1,140,000 8,860,000

Progress billings 1,140,000 8,860,000
To record progress billings
Cash 1,140,000 8,860,000
Accounts receivable 1,140,000 8,860,000
To record collections

Construction Expenses 3,200,000 2,800,000

Construction in Progress 1,800,000 2,200,000
Revenue from Construction 5,000,000 5,000,000
To recognize gross profit

Progress billings 10,000,000

Construction in Progress 10,000,000
To close construction in progress and progress billing accounts

Balance Sheet
20x5
Current Assets:
Contract asset:
Construction in Progress 5,000,000
Less: Progress Billings 1,140,000
Contract asset 3,860,000
Non-current Assets:
Property, Plant and
Equipment
Cost 1,600,000
Accumulated Depreciation 800,000
Carrying Amount 800,000

Income Statement
20x5 20x6
Revenue 5,000,000 5,000,000
Less: Costs/Expenses 3,200,000 2,800,000
Gross profit 1,800,000 2,200,000
Illustration 5: Cost recovery method

Asami Case 2: Assuming the same facts given for Asami Builders except
that at the beginning and end of 20x3 and 20x4, the contractor cannot
estimate the outcome of the contract with sufficient reliability to estimate
the project's percentage-of-completion (because of the uncertainties
arising from the new design and new materials the entity cannot estimate
total expected contract costs with sufficient reliability).
It is likely to receive the contract price from the customer. However, it is
probable that the cost incurred in 20x3 and 20x4 will be recoverable. The
contract was completed in 20x5.

The following table shows the data needed for further analysis:
20x3 20x4 20x5
Contract Price
Initial amount 440,000 440,000 440,000
Variations - 10,000 10,000
Total Contract Price 440,000 450,000 450,000
Costs incurred each year 105,040 203,360 106,600
Add: Costs incurred in
prior years - 105,040 308,400
Actual costs incurred to
date 105,040 303,400 410,000
Add: Estimated costs to
complete ? ? -
Total Estimated Costs ? ? 410,000

20x3 Recognized Recognized

To date in prior in current
years year
Revenue 105,040 - 105,040
Less: Costs/Expenses 105,040 - 105,040
Gross profit - - -

20x4 Recognized Recognized

To date in prior in current
years year
Revenue 303,400 105,040 198,360
Less: Costs/Expenses 303,400 105,040 198,360
Gross profit - - -

20x5 Recognized Recognized

To date in prior in current
years year
Revenue 450,000 303,400 146,600
Less: Costs/Expenses 410,000 303,400 106,600
Gross profit 40,000 - 40,000

20x3 20x4 20x5

Construction in Progress 105,040 198,360 106,600
Materials Inventory 5,000 5,000
Cash, payables, etc. 105,040 203,360 101,600
To record costs incurred

Accounts receivable 120,000 200,000 130,000

Progress billings 120,000 200,000 130,000
To record progress
billings

Cash 100,000 190,000 160,000

Accounts receivable 100,000 190,000 160,000
To record collections

Construction Expenses 105,040 198,360 106,600

Construction in Progress 40,000
Revenue from Construction 105,040 198,360 146,600
To recognize gross profit

Progress billings 450,000

Construction in Progress 450,000
To close construction in
progress and progress billing
accounts

Balance Sheet
20x3 20x4 20x5
Current Assets:
Accounts receivable 20,000 30,000 -
Raw materials inventory 5,000

Current Liability:
Contract Liability:
Progress Billings 120,000 320,000
 Less: Construction in 105,040 303,400
Progress
Contract liability 14,960 16,600

Income Statement
20x3 20x4 20x5
Revenue 105,040 198,360 146,600
Less: Costs/Expenses 105,040 198,360 106,600
Gross profit - - 40,000
 Illustration 6-a: Profitable contract – Loss in current period

Asami Case 3: Revising the data in Asami Builders in previous illustrations,

assume that at the end of 20x4, estimated cost to complete was increased
to P136,600 and this was the actual cost incurred in 20x5.

The following analysis shows the computation of the gross profit (loss) to be
recognized each year:
20x3 20x4 20x5
Total Contract Price (1) 440,000 450,000 450,000
Actual costs incurred to date (2) 105,040 303,400 440,000
Add: Estimated costs to
complete †298,960 136,600 -
Total Estimated Costs (3) 404,000 440,000 440,000
Estimated Gross Profit (1-3) 36,000 10,000 10,000
Percentage of Completion (2/3) 26% *69% 100%
Gross Profit to date 9,360 6,900 10,000
Less: Gross profit prior years - 9,360 6,900
Gross profit current year 9,360 (2,460) 3,100
*rounded off to whole percentage for discussion purposes
†squeezed

The revenue, expenses, and gross profit will be recognized as follows:

20x3 Recognized Recognized
To date in prior in current
years year
Revenue 114,400 - 114,400
Less: Costs/Expenses 105,040 - 105,040
Gross profit 9,360 - 9,360

20x4 Recognized Recognized

To date in prior in current
years year
Revenue (303,400+6,900) 310,300 114,400 195,900
Less: Costs/Expenses 303,400 105,040 198,360
Gross profit 6,900 9,360 (2,460)

20x5 Recognized Recognized

To date in prior in current
years year
Revenue 450,000 310,300 139,700
Less: Costs/Expenses 440,000 303,400 136,600
Gross profit 10,000 6,900 3,100

Entries to record revenue, cost, gross profit:

20x3 20x4 20x5
Construction Expenses 105,040 198,360 136,600
Construction in Progress 9,360 2,460 3,100
Revenue from Construction 114,400 195,900 139,700
To recognize gross profit

Assuming under zero profit method, no adjustment is necessary since the

contract will result in an overall profit. The entries would be as follows:
20x3 20x4 20x5
Construction Expenses 105,040 198,360 136,600
Construction in Progress 10,000
Revenue from Construction 105,400 198,360 146,600
To recognize gross profit
 Illustration 6-b: Unprofitable contract – anticipated losses

Asami Case 4: Assuming the same in Asami Builders in the previous

illustrations except that the estimated costs to complete the contract at the
end of 20x4 was P450,000.

20x3 20x4 20x5

Total Contract Price (1) 440,000 450,000 450,000
Actual costs incurred to date (2) 105,040 303,400 480,000
Add: Estimated costs to
complete †298,960 176,600 -
Total Estimated Costs (3) 404,000 480,000 480,000
Estimated Gross Profit (1-3) 36,000 (30,000) (30,000)
Percentage of Completion (2/3) 26% *63% 100%
*rounded off to whole percentage for discussion purposes
†squeezed

The following computation shows the amount to be reported for each of the
three years of the contract under the percentage-of-completion method:
20x3 Recognized Recognized
To date in prior in current
years year
Revenue 114,400 - 114,400
Less: Costs/Expenses 105,040 - 105,040
Gross profit 9,360 - 9,360

20x4 Recognized Recognized

To date in prior in current
years year
Revenue (450,000 * 63%) 283,500 114,400 169,100
Less: Costs (revenue plus 313,500 105,040 208,460
total loss)
Gross profit (loss) (30,000) 9,360 (39,360)

20x5 Recognized Recognized

To date in prior in current
years year
Revenue 450,000 283,500 166,500
Less: Costs/Expenses (actual 480,000 313,500 166,500
loss)
Gross profit (loss) (30,000) (30,000) -