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CA Intermediate · Advanced Accounting · AS 7 Construction Contracts

Yamuna Engineering reports on one fixed price contract at year end. Contract costs incurred plus recognised profits (no recognised losses) amount to ₹680 lakh. Progress billings raised are ₹700 lakh, of which ₹500 lakh has been received. How should the contract be shown under AS 7 disclosure requirements?

The contract is shown as a gross amount due to customers of ₹20 lakh, a liability. Costs plus recognised profits of ₹680 lakh are compared with progress billings of ₹700 lakh, and billings are higher by ₹20 lakh. Cash received does not affect this computation.

  1. AGross amount due from customers ₹20 lakh, as an asset
  2. BGross amount due to customers ₹20 lakh, as a liabilityCorrect
  3. CGross amount due to customers ₹120 lakh, as a liability
  4. DGross amount due from customers ₹180 lakh, as an asset

Explanation

The gross amount due from or to customers is the net of costs incurred plus recognised profits less recognised losses against progress billings. Here, 680 − 700 = −₹20 lakh, so progress billings exceed costs plus profits. This is shown as a gross amount due to customers of ₹20 lakh. Cash actually received (₹500 lakh) is not used in the calculation, so the figures of ₹120 lakh and ₹180 lakh are wrong.

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