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CA Intermediate · Advanced Accounting · AS 7 Construction Contracts

Kaveri Builders Ltd has a fixed price contract of ₹50 lakh for a warehouse. At the end of the first year, costs incurred are ₹28 lakh, which is 50% of the total estimated cost. Total estimated cost is now ₹56 lakh, so the company expects a loss on the contract. What total loss should Kaveri Builders recognise in the statement of profit and loss for the first year?

The company should recognise the entire expected loss of ₹6 lakh in year one, being total estimated cost of ₹56 lakh less contract price of ₹50 lakh. AS 7 requires an expected loss to be recognised immediately and in full, irrespective of the stage of completion.

  1. A₹3 lakh
  2. B₹6 lakhCorrect
  3. C₹28 lakh
  4. DNil, as the contract is only 50% complete

Explanation

Expected total loss = 56 − 50 = ₹6 lakh. AS 7 requires the whole expected loss to be recognised immediately, regardless of the stage of completion. Recognising only ₹3 lakh (revenue ₹25 lakh less cost ₹28 lakh) would apply the stage of completion to the loss, which is wrong; the remaining ₹3 lakh is a provision for foreseeable loss.

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