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CA Intermediate · Advanced Accounting · AS 7 Construction Contracts

Himalaya Projects Ltd has a contract with an initial fixed price of ₹1,000 lakh. Total estimated cost is ₹800 lakh throughout. In year 1, costs incurred were ₹200 lakh, so revenue of ₹250 lakh was recognised. In year 2, cumulative costs incurred are ₹480 lakh. During year 2, the customer agreed in principle to an incentive payment of ₹50 lakh for early completion; it is probable the performance standards will be met and the amount can be measured reliably. Stage of completion is on the cost proportion basis. What revenue should be recognised for year 2?

Year 2 revenue is ₹380 lakh. The probable and measurable incentive raises contract revenue to ₹1,050 lakh. Cumulative stage of completion is 480 divided by 800, or 60 per cent, giving ₹630 lakh cumulative revenue. Deducting ₹250 lakh recognised in year 1 leaves ₹380 lakh.

  1. A₹380 lakhCorrect
  2. B₹350 lakh
  3. C₹630 lakh
  4. D₹300 lakh

Explanation

The incentive is included in contract revenue because the AS 7 conditions are met, so total revenue is 1,000 + 50 = ₹1,050 lakh. Stage of completion at end of year 2 = 480/800 = 60%, giving cumulative revenue of ₹630 lakh. Year 2 revenue = 630 − 250 = ₹380 lakh. Ignoring the incentive gives ₹350 lakh, and failing to deduct year 1 revenue gives ₹630 lakh.

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