Skip to content

CA Intermediate · Advanced Accounting · AS 7 Construction Contracts

Tulsi Projects Ltd has a fixed price contract of ₹120 lakh. At the end of year 1, costs incurred were ₹30 lakh, including ₹6 lakh of materials delivered to the site but not yet used; total estimated cost was ₹100 lakh. At the end of year 2, cumulative costs incurred were ₹72 lakh, including ₹8 lakh of unused materials delivered to the site, and total estimated cost was revised to ₹80 lakh. Stage of completion is based on contract costs incurred for work performed to date. What contract revenue should be recognised in year 2?

Year 2 revenue is ₹67.2 lakh. Excluding unused site materials, year 1 completion is 24% (revenue ₹28.8 lakh) and year 2 cumulative completion is 64/80 = 80% (revenue ₹96 lakh). The difference of ₹67.2 lakh is the year 2 revenue.

  1. A₹60.0 lakh
  2. B₹67.2 lakhCorrect
  3. C₹72.0 lakh
  4. D₹96.0 lakh

Explanation

Costs of unused materials are excluded when computing the stage of completion. Year 1: (30−6)/100 = 24%, revenue = ₹28.8 lakh. Year 2: (72−8)/80 = 80%, cumulative revenue = ₹96 lakh. Year 2 revenue = 96 − 28.8 = ₹67.2 lakh. Including the unused materials gives ₹72 lakh (90% less 30% of ₹120 lakh), which is wrong.

Did you get it right without looking?

One question tells you little. A timed set on AS 7 Construction Contracts shows your real accuracy, how long you take and where you lose marks.

Practise AS 7 Construction ContractsFree diagnostic mock

More AS 7 Construction Contracts questions