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CA Intermediate · Advanced Accounting · AS 7 Construction Contracts

Konkan Infra Ltd. entered into a fixed price contract with a State road corporation for Rs 80 lakh. Up to the reporting date, contract costs incurred were Rs 30 lakh and estimated further costs to complete are Rs 30 lakh. Using the percentage of completion method on the cost-to-cost basis, what contract revenue should be recognised for the year (first year of the contract)?

Contract revenue recognised is Rs 40 lakh. Total estimated cost is Rs 60 lakh, so the stage of completion on a cost-to-cost basis is 50 percent, and applying this to the contract price of Rs 80 lakh gives Rs 40 lakh of 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. Percentage of completion = 30/60 = 50%. Revenue = 50% x 80 lakh = Rs 40 lakh. Rs 30 lakh is simply the cost incurred, which ignores the profit element and is wrong.

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