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CA Intermediate · Advanced Accounting · AS 7 Construction Contracts

Rao Projects has a Rs 200 lakh fixed price contract. Cost incurred to date is Rs 120 lakh including Rs 20 lakh of steel purchased and delivered to site but not yet used. Estimated further cost to complete, excluding the unused steel, is Rs 80 lakh. Stage of completion is by cost proportion. Revenue was nil in earlier years. What revenue is recognised to date, and what is the profit?

Placeholder

  1. ARevenue Rs 120 lakh; profit nil
  2. BRevenue Rs 120 lakh; profit Rs 20 lakh
  3. CRevenue Rs 100 lakh; profit Rs 0
  4. DRevenue Rs 100 lakh; profit Rs 20 lakhCorrect

Explanation

Unused material is excluded from cost incurred for stage of completion: 120 - 20 = Rs 100 lakh. Total estimated cost = 100 + 20 (steel to be used) + 80 = Rs 200 lakh? Steel is a future cost, so total = 120 + 80 = Rs 200 lakh. Stage = 100/200 = 50%, revenue = Rs 100 lakh. Cost charged = Rs 100 lakh, so profit would be nil.

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