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CA Intermediate · Advanced Accounting · AS 7 Construction Contracts

Konark Infra Ltd. is building a flyover for a state government under a fixed price contract of Rs 80 lakh. At the year-end, costs incurred to date are Rs 30 lakh, estimated costs to complete are Rs 30 lakh, and the outcome can be estimated reliably. Using the cost-to-cost method, what contract revenue is recognised for the year (first year of the contract)?

Revenue recognised is Rs 40 lakh. Total estimated cost is Rs 60 lakh, so the stage of completion is 30/60, or 50 percent. Applying this to the fixed contract price of Rs 80 lakh gives Rs 40 lakh of contract revenue for the year.

  1. ARs 30 lakh
  2. BRs 40 lakhCorrect
  3. CRs 50 lakh
  4. DRs 80 lakh

Explanation

Total estimated cost = 30 + 30 = Rs 60 lakh. Stage of completion = 30/60 = 50%. Revenue = 50% x 80 = Rs 40 lakh. Rs 30 lakh is merely cost incurred, which would be wrong because revenue is based on the percentage of completion applied to contract price.

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