Skip to content

CA Intermediate · Advanced Accounting · AS 7 Construction Contracts

Himalaya Projects Ltd has a fixed price contract of ₹500 lakh. At the end of the first year, costs incurred are ₹300 lakh and the estimated further cost to complete is ₹300 lakh. Progress is 50% on a cost basis. No loss was recognised earlier. What amount of loss should be recognised in the first year's statement of profit and loss in respect of this contract?

The loss to be recognised is ₹100 lakh. Total expected cost of ₹600 lakh exceeds the contract revenue of ₹500 lakh by ₹100 lakh. Under AS 7, an expected loss on a contract is recognised in full immediately as an expense, not in proportion to the stage of completion.

  1. A₹50 lakh
  2. B₹100 lakhCorrect
  3. C₹150 lakh
  4. DNil, because the contract is only 50% complete

Explanation

Total estimated cost = 300 + 300 = ₹600 lakh against contract revenue of ₹500 lakh, so the expected loss is ₹100 lakh. AS 7 requires the expected loss on a contract to be recognised as an expense immediately, regardless of the stage of completion. Recognising only 50% of the loss (₹50 lakh) would be wrong.

Did you get it right without looking?

One question tells you little. A timed set on AS 7 Construction Contracts shows your real accuracy, how long you take and where you lose marks.

Practise AS 7 Construction ContractsFree diagnostic mock

More AS 7 Construction Contracts questions