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CMA Intermediate · Cost Accounting · Contract Costing

Which statement about profit on an incomplete contract is correct under the conventional approach?

Under the conventional approach, no profit is taken to the Profit and Loss Account when work certified is below 25% of contract price, because the result is too uncertain. Prudence applies, and profit is recognised in part only as the contract progresses beyond that stage.

  1. ANo profit is taken to Profit and Loss Account if work certified is below 25% of contract priceCorrect
  2. BFull notional profit is always taken once 50% work is certified
  3. CProfit is taken only on completion of the contract
  4. DUncertified work is valued at selling price when computing notional profit

Explanation

Conventionally, if less than 25% is complete, no profit is credited because the outcome is uncertain; a fraction of profit is taken between 25% and 90%. Uncertified work is valued at cost, and full notional profit is not taken before near completion.

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