CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

ADVANCED FINANCIAL ACCOUNTING AND REPORTING GERMAN and VALIX

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
B. Installment contract
C. Franchise contract
D. Consignment contract

2. 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.

3. 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.

4. 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.

5. 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.

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6. 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.

7. How shall the contractor 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

8. Which of the following statements is FALSE regarding long-term construction contracts?

A. Any anticipated loss resulting from the contract must be recognized immediately and in
full.
B. If upon completion of the project the balance of Progress Billings is greater than the
balance of Construction in Progress, the excess is treated as a liability.
C. General administrative costs may be part of contract costs but would usually be expensed.
D. The latest estimates of anticipated cost of materials, labor and subcontracting costs and
indirect costs required to complete a project should be used to determine the progress
toward completion.

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Part II: Problem Solving:

Problem 1

On January 1, 2025, Entity A entered into a contract for the construction of a building at an original
price of P2,000,000 to be completed on June 30, 2027 subject to penalty of P500,000 on the year it
becomes virtually certain that construction will not be completed on the date agreed upon. On
January 1, 2026, the contract price increased by P2,500,000 due to the change in the design of the
building requested by the customer.

12/31/2025 12/31/2026 12/31/2027

Cumulative costs incurred as of the end of the year 600,000 3,075,000 3,780,000
Estimated remaining cost to complete at the end of
900,000 1,025,000 420,000
the year
Billings to date 800,000 2,800,000 3,300,000

1. Under IFRS 15, what is the realized gross profit (loss) to be recognized by Entity A for the
year ended December 31, 2027?
A. 200,000
B. (30,000)
C. (500,000)
D. 270,000

2. Under IFRS 15, what is the construction-in-progress balance as of December 31, 2026?
A. 3,075,000
B. 3,375,000
C. 3,675,000
D. 3,975,000

3. Under IFRS 15, what is the Excess CIP / (Excess Billings) as of December 31, 2026?
A. 275,000 contract asset
B. 525,000 contract liability
C. 1,175,000 contract asset
D. 537,500 contract asset

4. Under IFRS 15, what is the construction revenue recognized for the year ended December
31, 2027?
A. 3,600,000
B. 600,000
C. 225,000
D. 2,100,000

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Problem 2

BUILDER A entered into a fixed price contract of P120 million for the construction of a road for B
Corp. The estimated cost at completion is P75 million.

The following were the total actual costs incurred by BUILDER A during the first year of the
construction:

a. Research and development costs for which reimbursement is not specified in the
1,000,000
contract
b. Cost of negotiating the contract (charge immediately as expense) 500,000
c. Marketing costs 150,000
d. Costs of hiring equipment 700,000
e. Costs of materials used in construction 15,000,000
f. Costs of moving plant, equipment and materials to and from the contract site 200,000
g. Administrative costs not expected to be reimbursed 100,000
h. Depreciation of equipment used in construction 600,000
i. Site labor costs 5,000,000
j. Site supervision costs 1,000,000

Under IFRS15, what is the net income at the end of the year?
A. 13,500,000
B. 10,790,000
C. 11,750,000
D. 9,250,000

Problem 3

Reality, Inc. started on a contract in March 2025 to construct a commercial building. During 2025,
the entity used the cost to cost method. At December 31, 2025, the balances of certain accounts
were:

Excess of construction in progress over billings – due from customer 140,000

Progress billings – 1/5 of contract price 560,000

At December 31, 2025, the estimated future costs to complete the project was P1,350,000. Of the
amount billed 70% was paid in 2025 subject to retention provision of 15%, payable with the final
bill after the acceptance of entire completed project. A mobilization fee of 5% of the contract price
deductible from the final bill is payable in 10 days after the contract signing.

1. Under IFRS 15, what is the cost incurred to date in 2025?

A. 1,800,000
B. 1,350,000
C. 450,000
D. 700,000

2. Under IFRS 15, what is the total cash collections during 2025?
A. 392,000
B. 532,000
C. 333,200
D. 473,200

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Problem 4

On January 1, 2025, Entity A accepted a long-term construction project to construct a building with
an initial contract price of P10,000,000. During 2027, 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 12/31/2025 12/31/2026 12/31/2027
Cumulative costs incurred as of the end of the year P1,000,000 ? P10,800,000
Realized gross profit/(loss) during the year ? P350,000 (P1,600,000)
Percentage of completion as of the end of the year 12.5% 60% 90%
Under IFRS 15, what is the Construction cost of sales to be recognized in the Income
Statement for the year ended December 31, 2027?
A. 5,400,000
B. 4,600,000
C. 4,800,000
D. 5,500,000

Problem 5

On January 1, 2025, ABC Construction Corp. entered into a 3 year long-term construction contract
with Entity A. The agreed contract price was P10,000,000. The following were also the terms in the
contract:
● The contract price may increase or decrease depending on the completion of the construction
● If the construction will be completed ahead of schedule, for each day before the due date the
incentive will be P30,000 per day
● If the construction will be completed beyond the due date, for each day after the due date the
penalty will be P50,000 per day
● Another incentive bonus will be given in the amount of P250,000 in the event the percentage of
completion reaches at least 70% during the 2nd year of the construction. Based on its history of
completing construction projects, it is virtually certain that the construction will reach 70% in
the 2nd year.
● ABC Construction Corp. determined that the "expected value approach" is the best valuation for
the bonus incentive for early completion and penalty for the delay while the "most likely
approach" is the best valuation for the incentive bonus when the percentage of completion
reaches at least 70% during the 2nd year of the construction.
During the year 2025 the following data were ascertained:
No. of days Probability of happening
Early completion ahead of schedule 5 40%
On time completion - 35%
Late completion 4 25%
December 31, 2025
Actual cost incurred for the year 2,240,000
Estimated cost to complete 5,760,000
Under IFRS 15, what is the construction revenue recognized for the year ended December 31,
2025?
A. 2,802,800
B. 2,786,000
C. 2,872,800
D. 2,856,000
END
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