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CA Intermediate · Advanced Accounting · AS 7 Construction Contracts

Tulsi Constructions Ltd. has a fixed price contract for Rs 120 lakh. At the end of Year 1, costs incurred are Rs 48 lakh and estimated costs to complete are Rs 72 lakh. The outcome is reliably estimable. Contract revenue and costs recognised in earlier years were nil. What contract cost is recognised as an expense in Year 1 under the percentage of completion method, and what is the profit for the year?

Cost of Rs 48 lakh is recognised and profit is nil. Total estimated cost equals the Rs 120 lakh contract price, so no profit is expected. The stage of completion is 40 percent, giving revenue of Rs 48 lakh, which equals the cost incurred.

  1. ACost Rs 48 lakh; profit Rs 0Correct
  2. BCost Rs 48 lakh; profit Rs 48 lakh
  3. CCost Rs 40 lakh; profit Rs 8 lakh
  4. DCost Rs 120 lakh; profit Rs 0

Explanation

Total estimated cost = 48 + 72 = Rs 120 lakh, equal to the contract price, so expected profit is nil. Stage = 48/120 = 40%. Revenue = 40% x 120 = Rs 48 lakh. Cost recognised = costs incurred reflecting work done = Rs 48 lakh, so profit = 48 - 48 = nil.

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