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CA Intermediate · Advanced Accounting · AS 7 Construction Contracts

Sagar Builders has a contract with an original fixed price of ₹200 lakh. During the second year, the customer approved a variation adding ₹20 lakh to the price. Sagar has also lodged a claim of ₹10 lakh, which is at an early stage of negotiation, and an incentive of ₹5 lakh that is not yet probable. Estimated total contract cost is ₹176 lakh. Cumulative cost incurred is ₹44 lakh at the end of year 1 and ₹110 lakh at the end of year 2. Revenue recognised in year 1 was ₹50 lakh. Using cost to cost to measure the stage of completion, revenue to be recognised for year 2 is:

Year 2 revenue is ₹87.5 lakh. Contract revenue is ₹220 lakh including the approved variation but excluding the early-stage claim and the improbable incentive. At 62.5% completion cumulative revenue is ₹137.5 lakh, and deducting ₹50 lakh already recognised in year 1 gives ₹87.5 lakh.

  1. A₹87.5 lakhCorrect
  2. B₹93.75 lakh
  3. C₹75 lakh
  4. D₹137.5 lakh

Explanation

Contract revenue = 200 + 20 (approved variation) = ₹220 lakh; the claim and incentive are excluded because they are not yet sufficiently certain. Stage of completion at end of year 2 = 110/176 = 62.5%, so cumulative revenue = ₹137.5 lakh. Year 2 revenue = 137.5 - 50 = ₹87.5 lakh. Including the claim would give ₹93.75 lakh, which is wrong.

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