LONG-TERM CONSTRUCTION CONTRACTS

Inting Corporation constructs highly specialized communication satellites. A customer in Hong Kong recently placed an order for a cable TV satellite at a price of P20 million. The order was placed in April 20x6, and the satellite is to be delivered in one year. The customer has guaranteed to pay in full at the end of 20x6, regardless of progress or cancellation. Inting uses “proportion of time” as its measure of progress toward completion. When should Inting recognize revenue: at completion, or as the construction is performed?

a. Over time

b. Point in time

c. No revenue recognized

d. No performance obligation

a. Over time

Manner of payment is immaterial. Inting uses “proportion of time” means OVER-TIME.

DJD Construction is constructing a building for Hotel Dian. Under the construction agreement, if for any reason DJD can’t complete construction, Hotel Dian would own the partially completed building and could hire another construction company to complete the job. When should DJD recognize revenue: as the building is constructed, or after construction is completed?

a. Over time

b. Point in time

c. No revenue recognized

d. No performance obligation

a. Over time

Meets at least one criteria: “Customer can control”

Crown Construction Company entered into a contract with Star Hotel for building a highly sophisticated, customized conference room to be completed for a fixed price of P400,000. Nonrefundable progress payments are made on a monthly basis for work completed during the month. Legal title to the conference room equipment is held by Crown until the end of the construction project, but if the contract is terminated before the conference room is finished, Star retains the partially completed job and must pay for any work completed to date. When should revenue be recognized?

a. No transaction

b. No revenue

c. Point in Time

d. Over Time

d. Over Time

“Legal title to the conference room equipment is held by Crown until the end of the construction project, but if the contract is terminated before the conference room is finished, Star retains the partially completed job and must pay for any work completed to date.“

Regent Company entered into a contract with Star Hotel for constructing and installing a standard designed gym for a fixed price of P400,000. Nonrefundable progress payments are made on a monthly basis for work completed during the month. Legal title to the gym passes to Star upon completion of the building process. If Star cancels the contract before the gym construction is completed, Regent removes all the installed equipment and Star must compensate Regent for any loss of profit on sale of the gym to another customer. When should Regent recognize revenue?

a. No transaction

b. No revenue

c. Point in Time

d. Over Time

c. Point in Time

Assume DJD International Tower (Phase II) is developing luxury residential real estate and begins to market individual apartments during their construction. The Tower entered into a contract with Edwards for the sale of a specific apartment. Edwards pays a deposit that is refundable only if the Tower fails to deliver the completed apartment in accordance with the contract. The remainder of the purchase price is paid on completion of the contract when Edwards obtains possession of the apartment. When should revenue be recognized?

a. No transaction

b. No revenue

c. Point in Time

d. Over Time

c. Point in Time

“The remainder of the purchase price is paid on completion of the contract when Edwards obtains possession of the apartment.“

On January 1, 20x6, Silver Construction Company signed a contract to build a custom garage for a customer and received P10,000 in advance for the job. The new garage will be built on the customer’s land. To complete this project, Silver must first build a concrete floor, construct wooden pillars and walls, and finally install a roof. Silver normally charges stand-alone prices of P3,000, P4,000, and P5,000, respectively, for each of these three smaller tasks if done separately. How many performance obligations exist in this contract?

a. 0

b. 1

c. 2

d. 3

b. 1

Concrete floor, wooden pillars, and walls, roof cannot stand alone.

VJD Construction specializes in designing and installing customized manufacturing equipment. On February 1, 20x7, it signs a contract to design a fully automated wristwatch assembly line for P2 million, which will be settled in cash upon completion of construction. VJD Construction will install the equipment on the client’s property, furnish it with a customized software package that is integral to operations, and provide consulting services that integrate the equipment with VJD Construction’s other assembly lines. How many performance obligations exist in this contract?

a. 0

b. 1

c. 2

d. 3

b. 1

Customized software package that is integral to operations

Equipment installation, software, and consulting specific to assembly lines not enjoyable alone.