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CA Intermediate · Advanced Accounting · AS 7 Construction Contracts

Ganga Projects Ltd. has a fixed price contract of Rs 300 lakh. At the end of Year 1, costs incurred were Rs 150 lakh and estimated total cost was Rs 250 lakh (the outcome is reliably estimable). At the end of Year 2, cumulative costs incurred are Rs 280 lakh and estimated total cost has risen to Rs 340 lakh. Year 1 profit recognised was Rs 30 lakh. What amount of profit or loss should be recognised in Year 2 statement of profit and loss?

A loss of Rs 70 lakh is recognised in Year 2. The contract is expected to lose Rs 40 lakh overall (price 300 against cost 340), and the whole expected loss is recognised at once; since Rs 30 lakh profit was booked in Year 1, Year 2 bears Rs 70 lakh.

  1. ALoss of Rs 40 lakh
  2. BLoss of Rs 70 lakhCorrect
  3. CLoss of Rs 10 lakh
  4. DLoss of Rs 30 lakh

Explanation

Year 1: stage 60%, revenue 180, cost 150, profit 30. Year 2: expected total loss = 300-340 = 40 lakh, which must be recognised immediately in full. Cumulative result must be -40, so Year 2 = -40 - 30 = -70 lakh. Recognising only the Year 2 stage-based amount would understate the loss.

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