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CA Intermediate · Advanced Accounting · AS 7 Construction Contracts

Gupta Engineering Ltd began a contract for Rs 60 lakh. Contract costs incurred in the year were Rs 18 lakh, and the outcome cannot be estimated reliably. It is probable that Rs 12 lakh of costs incurred will be recoverable from the customer. What should the company recognise for the year under AS 7?

Revenue of Rs 12 lakh and contract cost expense of Rs 18 lakh. Where the outcome cannot be estimated reliably, revenue is limited to recoverable costs incurred, while all contract costs incurred are expensed in the period, so the shortfall appears as a loss.

  1. ARevenue Rs 12 lakh and contract cost expense Rs 18 lakhCorrect
  2. BRevenue Rs 18 lakh and contract cost expense Rs 18 lakh
  3. CRevenue Rs 12 lakh and contract cost expense Rs 12 lakh
  4. DRevenue Rs 30 lakh and contract cost expense Rs 18 lakh

Explanation

When the outcome cannot be estimated reliably, revenue is recognised only to the extent of contract costs incurred that are probable of recovery, here Rs 12 lakh. All contract costs incurred, Rs 18 lakh, are recognised as expense in the period. No profit is recognised.

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