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CA Intermediate · Advanced Accounting · AS 7 Construction Contracts

Navjyot Constructions is building a bridge for a state government. Its accountant is listing items for the contract cost under AS 7. Which of the following items should NOT be included in contract costs?

General administration costs without specified reimbursement in the contract are excluded from contract costs. Site insurance, directly related design and technical assistance, and depreciation of equipment used on the contract are all contract costs under AS 7, because they relate directly to the contract or can be allocated to it.

  1. AGeneral administration costs for which reimbursement is not specified in the contractCorrect
  2. BInsurance premium paid on the site and equipment used for the bridge contract
  3. CCosts of design and technical assistance directly related to the bridge
  4. DDepreciation of a crane used only on the bridge site

Explanation

Under AS 7, contract costs include costs that relate directly to the contract and costs attributable to contract activity in general that can be allocated to it, such as insurance, design and depreciation of equipment. General administration costs, selling costs and R&D costs are excluded unless the contract specifically reimburses them. Hence only the first item is excluded.

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