Reference no: EM132842588
Question 1 - In 20x5, Fargo Corporation began construction work under a three-year contract. The contract price is P4,800,000. Fargo uses the percentage-of-completion (over time) method for financial accounting purposes. The income to be recognized each year is based on the proportion of costs incurred to total estimated costs for completing the contract. The financial statement presentations relating to this contract at December 31, 20x5, follow:
Accounts receivable-construction contract billings P200,000
Construction in progress P600,000
Less contract billings 480,000
Costs and recognized profit in excess of billings 120,000
Income Statement
Income (before tax) on the contract recognized in 20x5 P120,000
1. How much cash was collected in 20x5 on this contract
a. P 40,000
b. P200,000
c. P280,000
d. P480,000
2. What was the initial estimated total income before tax on this contract?
a. P600,000
b. P640,000
c. P800,000
d. P960,000
Question 2 - Joey Construction specializes in the construction of commercial and industrial buildings. The contractor is experienced in bidding long-term construction projects of this type, with the typical project lasting fifteen to twenty-four months. The contractor uses the percentage-of-completion (over time) method of revenue recognition since given the characteristics of the contractor's business and contracts, it is the most appropriate method. Progress toward completion is measured on a cost-to-cost basis. Joey began work on a lump-sum contract at the beginning of 20x5. As bid, the statistics were as follows:
Lump-sum price (contract price) P4,000,000
Estimated costs
Labor P 850.000
Materials and subcontractor 1.750,000
Indirect costs 400,000 3,000,000
Estimated Gross Profit P1,000,000
At the end of the first year, the following was the status of the contract:
Billings to date P2,250,000
Costs incurred to date
Labor P 464.000
Materials and subcontractor 648.000
Indirect costs 193.000 1,305,000
Latest forecast total cost 3,000,000
It should be noted that included in the above costs incurred to date were standard electrical and mechanical materials stored on the job site, but not yet installed, costing P105,000. These costs should not be considered in the costs incurred to date.
1. Compute the percentage of completion on the contract at the end 20x5.
a. 35.00%
b. 40.00%
c. 43.50%
d. 46.67%
2. Indicate the amount of gross profit that would be reported on this contract at the end of 20x5.
a. P200,000
b. P400.000
c. P540,000
d. P667,000