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CA Intermediate · Advanced Accounting · AS 7 Construction Contracts

Narmada Projects has a fixed price contract of Rs 200 lakh. Year 1: costs incurred Rs 60 lakh, estimated further cost Rs 120 lakh. Year 2: cumulative costs Rs 150 lakh, estimated further cost Rs 60 lakh. What is the profit recognised in Year 2 alone (AS 7, cost-to-cost)?

Total estimated cost rises to Rs 210 lakh against revenue of Rs 200 lakh, so a loss arises and the whole expected loss is recognised. The options given do not reflect this result, so this question should not be relied upon.

  1. ARs 5.00 lakh
  2. BRs 4.29 lakhCorrect
  3. CRs 9.29 lakh
  4. DRs 14.29 lakh

Explanation

Year 1: total cost 180; stage 60/180 = 1/3; revenue 66.67; cost 60; profit 6.67. Year 2: total cost 210; stage 150/210 = 5/7; cumulative revenue = 142.86; cumulative profit = 142.86 - 150 = loss -7.14. Year 2 profit = -7.14 - 6.67 = -13.81. Recheck: total expected profit is 200 - 210 = a loss of 10, so whole expected loss of 10 must be recognised; cumulative loss -10, Year 2 = -10 - 6.67 = -16.67. None matches, so the stated options are unreliable.

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