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CA Intermediate · Advanced Accounting · AS 7 Construction Contracts

Tapi Projects Ltd. has a fixed price contract of Rs 120 lakh. Cumulative costs incurred are Rs 90 lakh and estimated costs to complete are Rs 60 lakh. Revenue and cost recognised in earlier years: revenue Rs 50 lakh, costs Rs 50 lakh. Under AS 7, what is the total foreseeable loss to be recognised immediately, and what is the loss to be charged in the current year (over and above amounts already recognised)?

The full expected loss of Rs 30 lakh must be recognised at once. Since earlier years showed no profit or loss, the entire Rs 30 lakh falls in the current year, so none of the offered current-year figures except the full amount is right.

  1. ATotal Rs 30 lakh; current year Rs 30 lakh
  2. BTotal Rs 30 lakh; current year Rs 12 lakh
  3. CTotal Rs 30 lakh; current year Rs 18 lakhCorrect
  4. DTotal Rs 30 lakh; current year Rs 0

Explanation

Total cost = 90+60 = 150; price 120; expected loss 30 lakh, recognised immediately in full. Completion = 90/150 = 60%; cumulative revenue 72 lakh. Cumulative cost 90, so loss on work done = 18 lakh. Earlier profit/loss was nil (50 vs 50). Provision for the remaining expected loss = 30-18 = 12 lakh. Current year charge = 18 + 12 = 30 lakh. Check: total loss 30, earlier nil, so current year bears all 30.

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