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CA Intermediate · Advanced Accounting · AS 7 Construction Contracts

Ganga Builders Ltd has a fixed-price contract of ₹50 lakh. At the year end, costs incurred are ₹30 lakh, all relating to work done, and estimated further costs to complete are ₹30 lakh. Stage of completion is measured by cost proportion. Revenue and cost are recognised in the statement of profit and loss by the percentage of completion method. What amount should be recognised as provision for foreseeable loss at the year end, over and above the loss on work done to date?

The additional provision is ₹5 lakh. The expected total loss is ₹10 lakh (price 50 lakh, total cost 60 lakh). Work done to date already shows a loss of ₹5 lakh (revenue 25 lakh, cost 30 lakh), so the remaining ₹5 lakh is provided immediately.

  1. A₹10 lakh
  2. B₹5 lakhCorrect
  3. C₹25 lakh
  4. DNil

Explanation

Total estimated cost is 60 lakh against a price of 50 lakh, so the expected total loss is 10 lakh. Completion is 30/60 = 50%, so revenue is 25 lakh against costs of 30 lakh, a loss of 5 lakh on work done. AS 7 requires the whole expected loss to be recognised immediately, so the remaining 5 lakh is provided for. Providing 10 lakh would double count the 5 lakh already in the profit and loss account.

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