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CA Intermediate · Advanced Accounting · AS 7 Construction Contracts

Deccan Builders Ltd. has a fixed price contract for Rs 200 lakh. Cost incurred to date is Rs 120 lakh, which includes Rs 20 lakh of steel purchased and delivered to the site but not yet used in construction. Estimated further cost to complete (excluding the unused steel) is Rs 80 lakh. Using the cost-to-cost method, what is the contract revenue to be recognised to date as per AS 7?

Revenue to be recognised is Rs 100 lakh. Under AS 7, material delivered but not yet used is excluded from costs when working out the stage of completion. Work-done cost is Rs 100 lakh against total cost of Rs 200 lakh, giving 50 percent of the Rs 200 lakh contract price.

  1. ARs 120 lakh
  2. BRs 110 lakh
  3. CRs 100 lakhCorrect
  4. DRs 96 lakh

Explanation

Costs reflecting work performed exclude materials not yet used: 120 - 20 = Rs 100 lakh. Total estimated cost = 100 + 20 (unused steel still to be used) + 80 = Rs 200 lakh, or equivalently 120 + 80 = 200. Stage of completion = 100/200 = 50%. Revenue = 50% x 200 = Rs 100 lakh. Using Rs 120 lakh gives 60% and Rs 120 lakh revenue, which wrongly includes unused material.

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