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CA Intermediate · Advanced Accounting · AS 7 Construction Contracts

Shivalik Constructions Ltd has a fixed price contract of ₹1,000 lakh. At the year end, costs incurred to date are ₹480 lakh, which include ₹80 lakh of materials delivered to the site but not yet used. Total estimated contract cost is ₹800 lakh. The company uses the proportion of costs incurred to estimated total costs to measure stage of completion. What contract revenue should be recognised to date?

Revenue recognised is ₹500 lakh. Materials of ₹80 lakh not yet used are excluded from costs reflecting work done, leaving ₹400 lakh. Stage of completion is 400 divided by 800, which is 50 per cent, and 50 per cent of the ₹1,000 lakh contract price gives ₹500 lakh.

  1. A₹600 lakh
  2. B₹500 lakhCorrect
  3. C₹480 lakh
  4. D₹400 lakh

Explanation

Costs of materials delivered but not yet used do not reflect performance, so they are excluded: 480 − 80 = ₹400 lakh. Stage of completion = 400/800 = 50%. Revenue = 50% × 1,000 = ₹500 lakh. Using the full 480 would give 60% and ₹600 lakh, which is wrong.

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