Long Term Construction Contracts

Problem 1:

Wang Constructors has the following data relating to its jobs in progress:

Project Actual Cost Estimated Cost Percentage of Contract Price

Completion
A1 17 512 000 350 240 000 ? 384 000 000

B2 22 914 000 30 552 000 ? 35 000 000

C3 107 730 000 ? 80% 175 000 000
D4 5 300 000 ? 100% 9 400 000

Billings are done as follows: (a) 20% down payment upon contract signing, and (b) balance is
billed according to percentage of completion.

Question:

Compute the amount of constructions in progress(net)- due from customers or progress

billings(net) – due to customers under the two method: percentage of completion and cost recovery.

Answers:

Percentage of Completion Method:

Cost Recovery Method :
Problem 2

On December 31, 2018, DYLAN Construction Corporation contracted to build an office building for SMA
Company for a total contract price of 10 000 000. Estimated total cost to complete 2 200000. Costs
incurred to date related to the project are as follows:

Cost of direct materials used 350 000

Cost of direct labor, including 230 000
supervision of P50000
Insurance costs 180 000
(2/3 for other project)
Cost of contracted research and 305 000
development
Cost of indirect materials used 255 000
Selling costs 60 000
Depreciation of idle equipment not 315 000
used on a particular contract
Cost of wasted materials, labor, or 125 600
other resources that were not
reflected in the price of the contract
Depreciation of equipment used on 250 000
the project
Borrowing cost incurred during the 350 000
construction period

Additional Information:

The project was estimated to be completed in two years, and the contract provided for:

1. 5% Mobilization fee (to be deducted from the last billing) payable within 15 days after the
signing of the contract
2. 10% retention provision on all billings
3. Payment of progress billings within 10 days from acceptance.

DYLAN, which uses the percentage of completion method of accounting, estimated a 25% gross
margin on the project. By the end of 2018, DYLAN had presented progress billings corresponding to
the percentage of completion. All of the progress billings presented in 2018 were accepted, except
last one for 15% which was accepted on January 15, 2019. With the exception of one bill for 10%
which was due on January 20, 2019, all billings accepted in Dec. 31, 2018 were settled.

Question: Answers:

1. What is the percentage of completion? 45%

2. Payments made by SMA Company in 2018 amounted to:
 Franchise
Problem 1

On August 31, 2018, Meteor Garden Company entered into franchise agreements with four franchisees.
The agreements required an initial fee payment plus four 300 000 payments due four months, the first
payment due December 31, 2018. The market interest rate is 12%. The initial deposit is refundable until
substantial performance has been completed. The following table describes each agreement:

Total Costs Incurred

Franchisee Probability of Services Performed Cash Paid
to
by Franchisor
Full Collection Dec. 31, 2018
(Dec 31, 2018)
Dao Ming Si Likely 95% 700 000 700 000
Hua Zei Lei Doubtful 30% 500 000 200 000
Ximen Yang Likely 100% 200 000 500 000
Fang Meizuo Doubtful 15% 800 000 1 000 000

The agreement also provides that the four franchisees pay annually to Meteor Garden Company
a continuing franchise fee equal to 5% of their gross sales. The gross sales reported to the franchisor is
400 000 for 2018.

Question:

1. What amount of net income to be reported in 2018 from each franchisee? (use 4 decimals)
Problem 2

On January 3, 2018, SMA Company signed an agreement to operate as a franchisee of DWA, Inc. for an
initial franchise fee of 5 000 000 for 10 years. Of this amount, 70% was paid when his agreement was
signed and the balance payable in six quarterly payments beginning March 31, 2018, SMA Company
signed a non-interest bearing note for the balance. SMA’s credit rating indicates that it can borrow
money at 24% on the loan of this type. Substantial services costing 1 419 000 have been rendered by
DWA Inc. and also incurred indirect cost of 350 000. PV of an annuity of P1 at 6% for 6 periods is 4.92

Questions:

1. If the collection of note is not reasonably assured, the realized gross profit for the year ended
December 31, 2018 is:
2. What is the net income of the franchisor for the year ended Dec. 31, 2018, if the collection of
note is reasonably assured?