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CA Intermediate · Advanced Accounting · AS 7 Construction Contracts

Malwa Constructions Ltd. has a fixed price contract of Rs 500 lakh. At the end of year 1, cost incurred is Rs 360 lakh and estimated cost to complete is Rs 240 lakh, so the contract is expected to make a loss. Progress is 60% on cost-to-cost basis. What amount of contract loss should be recognised as an expense in year 1 as per AS 7?

The loss to be recognised in year 1 is Rs 100 lakh. Estimated total cost of Rs 600 lakh exceeds contract revenue of Rs 500 lakh, and AS 7 requires the full expected loss to be recognised immediately as an expense, not apportioned by the stage of completion.

  1. ARs 60 lakh
  2. BRs 100 lakhCorrect
  3. CRs 40 lakh
  4. DRs 140 lakh

Explanation

Total estimated cost = 360 + 240 = Rs 600 lakh against contract revenue of Rs 500 lakh, so expected loss = Rs 100 lakh. AS 7 requires the entire expected loss to be recognised immediately as an expense, irrespective of stage of completion. Recognising only 60% of the loss (Rs 60 lakh) would be wrong.

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