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CA Intermediate · Advanced Accounting · AS 7 Construction Contracts

Rajdhani Constructions Ltd has a fixed-price contract of ₹80 lakh. At the end of Year 1, costs incurred were ₹20 lakh and estimated further costs to complete were ₹30 lakh. At the end of Year 2, cumulative costs incurred were ₹45 lakh and estimated further costs to complete were ₹15 lakh. The company uses the proportion of cost incurred to total estimated cost as the stage of completion, and all costs incurred reflect work performed. What contract revenue should be recognised for Year 2?

Year 2 revenue is ₹28 lakh. Cumulative completion at the end of Year 2 is 45/60, which is 75%, giving cumulative revenue of ₹60 lakh. Deducting the ₹32 lakh recognised in Year 1 leaves ₹28 lakh for Year 2.

  1. A₹60 lakh
  2. B₹32 lakh
  3. C₹25 lakh
  4. D₹28 lakhCorrect

Explanation

Year 1: total cost is 50, so completion is 40% and revenue is 32 lakh. Year 2: total cost is 45+15=60, so completion is 75% and cumulative revenue is 60 lakh. Year 2 revenue is 60-32=28 lakh. Recognising ₹60 lakh is wrong because it is the cumulative figure and ignores the revenue already recognised in Year 1.

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