Question

5) Lovely Construction Co. was engaged on October 1, 2016 to construct a building for a contract price of P8,400,000 payable in 5 installments. One-fifth of the contract price was to be paid upon completion of each quarter of the work (as defined in detail by thr terms of the contract), the final payment being due within 10 days after acceptance of the completed project. By December 29, 2016, 3/4 of the building had been completed whereupon the third billing was made in accordance with the terms of the contract (cash had been received on the previous bilings). During 2016, a total of 4,200,000 had been disbursed by Lovely for costs incurred and, at year-end, outstanding accounts payable for materials purchases totaled P 1,000,000. Lovely expected that an additional P 1,800,000 would be required to complete the project. Using percentage-of-completion method on an output basis proportional method, the gross profit to be recognized in the 2016 income statement would be: a. P 950,000 c. P 1,050,000 b. P 1,040,000 d. P 1,100,000 4) Using the same information in No. 5, percentage-of-completion output method-actual costs approach, the gross profit to be recognized in 2016 income statement would be: a. P 950,000 c. P1,050,000 b. P 1,040,000 d. P 1,100,000

Answer 1

The correct answer is option D P 1,100,000

Working

By December 29, 2016 3/4 of the building had been completed.

Percentage of completion on an output basis proportional method = 75% (3/4 of the project)

Revenue to be recognised = 8400000*75% = P 6,300,000

Cost incurred till date = 4200000+1000000 = P 5,200,000

Gross Profit = 6300000-5200000 = P 1,100,000

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Correct answer in option B P 1,040,000

Working

By December 29, 2016 3/4 of the building had been completed.

Percentage of completion on an actual cost approach = cost incurred till date/Estimated cost of completion

Cost incurred till date = P 5,200,000

Estimated cost of completion = P 7,000,000

Percentage of completion on an actual cost approach = 5200000/7000000

Revenue to be recognised = 8400000*(5200000/7000000) = P 6,240,000

Cost incurred till date = 4200000+1000000 = P 5,200,000

Gross Profit = 6240000-5200000 = P1,040,000