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CA Intermediate · Advanced Accounting · AS 7 Construction Contracts

Ganga Builders Ltd started a fixed price contract of ₹600 lakh during the current year. Costs incurred to date are ₹420 lakh and estimated further costs to complete are ₹280 lakh. Stage of completion is measured on the cost proportion basis. No amount was recognised in earlier years. What is the total loss to be recognised in the statement of profit and loss for the current year in respect of this contract?

The loss recognised is ₹100 lakh. Total estimated cost of ₹700 lakh exceeds the contract price of ₹600 lakh, and AS 7 requires an expected loss to be recognised in full immediately, regardless of stage of completion. Only 60 per cent of it is not permitted.

  1. A₹60 lakh
  2. B₹40 lakh
  3. C₹100 lakhCorrect
  4. D₹140 lakh

Explanation

Total estimated cost = 420 + 280 = ₹700 lakh, against price ₹600 lakh, so the expected total loss is ₹100 lakh. Stage of completion = 420/700 = 60%, giving revenue of ₹360 lakh and cost of ₹420 lakh, a loss of ₹60 lakh. AS 7 requires the whole expected loss to be recognised immediately, so a further ₹40 lakh is provided and the total loss is ₹100 lakh. Recognising only 60% of the loss is wrong.

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