118.

2 Illustrative Examples LTCC

1. POC and Zero Profit methods. AMG Construction Company agrees to
build a large office building for PG Towers for a total contract price of P5m.
PG Towers will make annual payments to AMG, but the amounts of these
payments cannot exceed the direct costs incurred by AMG. The contract is
signed on October 1, 2009 and AMGs year-end is December 31. The
contract provides PG with a final inspection right to ensure compliance
with the contract terms prior to accepting the completed project.
Illustration 10-1 below gives further information about the contract.

Total contract price

Total anticipated costs (at
10/2009)

5,000,000

2009
P1,350,0
00
3,150,00
0
400,0
00
275,0
00

2010
P2,250,0
00
400,0
00
2,000,00
0
2,100,00
0

Item
Cost incurred each year
Estimated costs to complete (at
year end)
Progress billing each year
Progress payments received each
year

4,500,000
2011
P400,0
00

Total
P4,000,0
00

2,600,00
0
2,625,00
0

5,000,00
0
5,000,00
0

Prepare JEs for 2009-2011.

2. Anticipated losses on LTCC. Assume on no. 1 that at the end of 2010,
the estimated cost to complete was increased to P1,260,000 and this was
the actual cost incurred in 2011.
Prepare JEs for 2009-2011.
3. Anticipated losses on LTCC. Assume on no. 1 that at the end of 2010,
the estimated cost to complete was increased to P1,500,000 instead of
P400,000. Assume also that actual cost equalled expected costs in 2011.
Prepare JEs for 2009-2011.
4. Contract retention. If out of the total billings during the year of P1m,
10% is agreed upon as contract retention, what would be the entry to
record the collection of the P900,000?
5. IAS example. A construction contractor has a fixed price contract for
9,000 to build a bridge. The initial amount of revenue agreed in the
contract is 9,000. The contractors initial estimate of contract costs is
8,000. It will take 3 years to build the bridge. By the end of year 1, the
contractors estimate of contract costs has increased to 8,050. In year 2,
the customer approves a variation resulting in an increase in contract
revenue of 200 and estimated additional contract costs of 150. At the end

of year 2, costs incurred include 100 for standard materials stored at the
site to be used in year 3 to complete the project. The contractor
determines the stage of completion of the contract by calculating the
proportion that contract costs incurred for work performed to date bear to
the latest estimated total contract costs. A summary of the financial data
during the construction period is as follows:

9,00
0

Year 2
9,0
00
2
00
9,2
00

Year 3
9,00
0
20
0
9,20
0

6,1
68
2,0
32
8,2
00

8,20
0

Total estimated contract costs

2,09
3
5,95
7
8,05
0

Estimated profit
Stage of completion

95
0
26%

1,0
00
74%

1,00
0
100%

Initial amount of revenue agreed in

contract
Variation
Total contract revenue

Contract costs incurred to date

Contract costs to complete

Year 1
9,00
0

8,20
0

Compute the amounts of revenues, expenses and profits recognised in the

statement of comprehensive income for each of the three years.