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CA Intermediate · Advanced Accounting · AS 7 Construction Contracts

Himalaya Projects Ltd has a fixed-price contract of ₹200 lakh with total estimated contract cost of ₹150 lakh. Costs incurred to date are ₹90 lakh. These include ₹10 lakh of materials delivered to the site but not yet used, and a ₹5 lakh advance paid to a sub-contractor for work not yet performed. Stage of completion is measured by the proportion of cost incurred for work performed to total estimated cost, and the ₹15 lakh is included in the ₹150 lakh total estimate. What profit should be recognised to date?

The profit to recognise is ₹25 lakh. Unused materials and the sub-contractor advance, totalling ₹15 lakh, relate to future work and are excluded, so completion is 75/150, which is 50%. Revenue is ₹100 lakh, cost is ₹75 lakh, leaving a profit of ₹25 lakh.

  1. A₹30 lakh
  2. B₹25 lakhCorrect
  3. C₹50 lakh
  4. D₹10 lakh

Explanation

Materials not yet used and sub-contractor advances relate to future activity, so they are excluded when measuring stage of completion. Cost of work performed is 90-15=75 lakh, so completion is 75/150=50%. Revenue is 100 lakh, cost recognised is 75 lakh, and profit is 25 lakh (equal to 50% of the expected profit of 50 lakh). Using the full 90 lakh gives 60% and 30 lakh, which is wrong.

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