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CMA Intermediate · Cost Accounting · Contract Costing

For a contract with a notional profit of Rs 5,00,000, work certified is Rs 36,00,000 and contract price Rs 40,00,000 (so 90% complete). Cash received is Rs 32,40,000. Using the formula notional profit x cash received / contract price, what profit is transferred to the Profit and Loss Account?

Rs 4,05,000 is transferred. For a nearly complete contract, the estimated total profit is not used here; the stated formula multiplies notional profit Rs 5,00,000 by cash received over contract price, 32,40,000/40,00,000 = 81%, giving Rs 4,05,000.

  1. ARs 4,05,000Correct
  2. BRs 4,50,000
  3. CRs 5,00,000
  4. DRs 3,60,000

Explanation

For contracts 90% or more complete, profit = notional profit x cash received / contract price = 5,00,000 x 32,40,000 / 40,00,000 = 4,05,000. Rs 4,50,000 wrongly uses cash/work certified (90%).

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