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CA Intermediate · Advanced Accounting · AS 7 Construction Contracts

Sagar Constructions Ltd has a fixed price contract of ₹80 lakh. Estimated total cost is ₹60 lakh throughout the contract. Costs incurred are ₹18 lakh up to the end of year 1 and ₹42 lakh cumulatively up to the end of year 2. The company uses the cost-to-cost method to determine the stage of completion. What contract revenue should be recognised in year 2?

Year 2 revenue is ₹32 lakh. Cumulative completion at the end of year 2 is 42/60 = 70%, giving cumulative revenue of ₹56 lakh. Deducting the ₹24 lakh already recognised in year 1 (30% of ₹80 lakh) leaves ₹32 lakh for year 2.

  1. A₹24 lakh
  2. B₹32 lakhCorrect
  3. C₹42 lakh
  4. D₹56 lakh

Explanation

Year 1 completion = 18/60 = 30%, revenue = ₹24 lakh. Year 2 cumulative completion = 42/60 = 70%, cumulative revenue = ₹56 lakh. Year 2 revenue = 56 − 24 = ₹32 lakh. ₹56 lakh is the cumulative figure, and ₹24 lakh is the year 2 cost, not revenue.

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