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CA Intermediate · Advanced Accounting · AS 7 Construction Contracts

Kaveri Infra Ltd. has a fixed-price contract of ₹50 lakh. At the end of the first year, costs incurred to date are ₹36 lakh and the estimated further cost to complete is ₹24 lakh. Assume the percentage of completion is measured by cost to cost and the price is not expected to change. What amount of loss should be recognised in the Statement of Profit and Loss for the first year?

The loss to be recognised is ₹10 lakh. Total estimated cost is ₹60 lakh against a contract price of ₹50 lakh, and AS 7 requires the entire expected loss to be recognised immediately as an expense, not in proportion to the stage of completion.

  1. A₹10 lakhCorrect
  2. B₹6 lakh
  3. C₹4 lakh
  4. DNil, as the loss will be recognised only when the contract is completed

Explanation

Total estimated cost = 36 + 24 = ₹60 lakh against price ₹50 lakh, so the expected loss is ₹10 lakh. Under AS 7 an expected loss on a contract is recognised as an expense immediately, irrespective of the stage of completion. Recognising only 60% of the loss (₹6 lakh) is wrong because the full loss is charged at once.

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