On January 1, 20×18, Hardrock Company started the construction [Solved]

Question 1

On January 1, 20×18, Hardrock Company started the construction

Question 2

On January 1, 20×18, Hardrock Company started the construction

On January 1, 2018, DMCI Company 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 construction contract cannot be estimated reliably

During 2018, the entity billed the customer equivalent to 30% of the contract price. During 2019, 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 the year of completion of the project.

The entity made collection from the customer at the end of  2018, 2019 and 2020, in the amount of P120,000, P450,000 and P180,000, respectively. The entity provided the following data concerning the direct costs related to the said project:

Question 3

On January 1, 20×18, Hardrock Company started the construction

Question 4

On January 1, 20×18, Hardrock Company started the construction

It has been given that DMCI company billed the customer 30% of contract price during the year 2018,20% of contract price during the year 2019 & 40% of contract price during the year 2020. and received total 750000 till 2020 (i.e. 120000+450000+180000)

Total billing to customer till 2020 is 90% of contract price (i.e. 30%+20%+40%

Progres billing till 2020 (1000000 x 90%). = 900000

Balance of trade receivable.                         = 150000

The correct answer is option 150000

Step 1: Introduction

Gross profit is the difference between the total revenues and cost of goods sold. The financial ratio that demonstrates the link between gross profit and net sales is gross profit percentage. It is a metric for determining a company’s profitability.

Step 2: Realized gross profit for the year ended December 31, 2019

Step 3: Conclusion

Therefore, Option  (C) is the Correct answer i.e. 150,000

1) RGP for 20×19

P150,000

To decrease total loss from 200k on 20×18 to only 50k on 20×19. (Complete sol’n on explanation)

2) Excess Progress Billings

Progress Billings (30% + 40% + 20%) =

90% x P1M = P900,000

Con. In Progress (cum. costs incurred at date)

= P870,000

900k – 870k = P30,000 EXCESS PB

3) Accounts receivable as of 20×20

Progress Billings                                    900,000

(less mob. fee paid of P1M x 5%        = 50,000)

850,000     Collected amounts

(120k + 450k + 180K)                           750,000

Balance as of 20×20                       P   100,000

Step-by-step explanation

1) RGP for 20×19          P150,000

20×19 is only the second year. And the estimated total costs to complete is greater than contract price, resulting to the balance of Loss at 20×19 to be P50,000 only (compared to the 200,000 prior year).

To update the loss balance to 50,000 only for 20×19, we should recognize the difference of 50k and 200k of P150,000 as realized gross profit.

>> It is to be noted that loss should always be recognized in full when the total estimated costs at completion is greater than the contract price.

2) P30,000 excess progress billings

CIP (Construction In progress)

Less: Progress billings (billings of customer)

Equals: CIP in excess of billings (if CIP is greater               than PB)

Billings in excess of CIP (if CIP is less                     than PB)

From the problem:

>> Progress billings is equal to the total balance of A/R at current date. PB (computed at #2) of 900,000 is deducted by the advance payment of Mobilization fee to arrive at the correct A/R balance. This amount of P850,000 will be deducted by the total amounts collected at date equal to 750,000, resulting to Balance of P100,000 at 20×20.

Hope this helps! Long-term Construction Contracts has always been an AFAR topic that brings in confusion but continue to solve problems to practice yourself! I recommend Sir Paul De Jesus’ comprehensive textbook for better understanding.