On January 1, 20x1, Alpha Development Corporation entered into a contract with Omega Company to construct a new corporate headquarters on land owned by Omega. The contractor determines that the control of the building is passed to Omega as it is constructed. Therefore, the performance obligation is satisfied overtime. The contract price is P6,000,000, but the amount will be reduced or increased depending on when the construction of the building is completed. For each day before December 31, 20x3 that the building is completed, the promised consideration increases
On January 1, 20x1, Alpha Development Corporation entered into a contract with Omega Company to construct a new corporate headquarters on land owned by Omega. The contractor determines that the control of the building is passed to Omega as it is constructed. Therefore, the performance obligation is satisfied overtime. The contract price is P6,000,000, but the amount will be reduced or increased depending on when the construction of the building is completed. For each day before December 31, 20x3 that the building is completed, the promised consideration increases by P30,000. For each day after December 31, 20x3 that the building is incomplete, the promised consideration will be reduced by P30,000. The parties have also agreed that when the building is complete, it will be inspected and assigned a green building certification level. If thebuilding achieves the certification level specified in the contract, Alpha will be entitled to an incentive bonus ofP150,000.
On December 31, 20x1, Alpha determined that the expected value better predicts the variable consideration it will receive regarding the early completion or delay of the construction because of the different outcomes possible based on Alpha’s current construction schedule and its experience with past projects. Alpha estimates that it is 55% likely to complete the project nine (9) days ahead of schedule, 25% likely to complete the project on time, and 20% likely to complete the project six (6) days past schedule.
As of the same date, on the other hand, Alpha determined that the “most likely amount” is the better predictor to estimate the variable consideration associated with the green building certification bonus because there are only two (2) possible outcomes (P150,000 or P0). Based on its history of completing building projects that achieve the green building certification level specified in the contract, and in the absence of factors that may indicate the criteria may not be met, Alpha decided to include the bonus in the transaction price.
On December 31, 20x2, Alpha did not change its estimate with respect to green building certification bonus, but after evaluating construction completed to date and the remaining project schedule, Alpha determines it is now 70% likely to complete the project 10 days ahead of schedule, and 30% likely to complete the project on time and receive no incentive bonus.
The following construction costs were provided by Alpha for the years ended December 31, 20x1, and 20x2: 20x1 20x2Contract costs incurred during the year P2,880,000 P900,000Estimated costs to complete at the end of the year 1,920,000 1,620,000
REQUIRED: Under IFRS 15, assuming the outcome of construction can be estimated reliably, determine the realized gross
1. Realized gross profit (loss), 20x1 _____________
2. Realized gross profit (loss), 20x2 _____________
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