AS 7 CONSTRUCTION CONTRACTS

3 AS 7 CONSTRUCTION CONTRACTS

Question 1 Nov 2018 RTP/May 2018 RTP

Uday Constructions undertake to construct a·bridge for the Government of Uttar Pradesh. The
construction commenced during the financial year ending 31.03.2018 and is likely to be

completed by the next financial year. The contract is for a fixed price of ` 12 crores with an

escalation clause. You are given the following information for the year ended 31.03.2018:

Cost incurred upto 31.03.2018 ` 4 crores

Cost estimated to complete the contract ` 6 crores

Escalation in cost by 5% and accordingly the contract price· is increased by 5%.

You are required to ascertain the state of completion and compute the amount of revenue and
profit to be recognized for the year as per AS-7.

Answer :

Profit to be recognised is ` 1.04 Crores

Question 2 MTP 2018

M/s Highway Constructions undertook the construction of a highway on 01.04.2016. The
contract was to be completed in 2 years. The contract price was estimated at Rs. 150 crores. Up
to 31.03.2017 the company incurred Rs. 120 crores on the construction. The engineers involved
in the project estimated that a further Rs. 45 crores would be incurred for completing the work.
What amount should be charged to profit and loss statement for the year 2016-17 as per the
provisions of Accounting Standard 7 "Construction Contracts"?

Answer :

Loss to be recognised is `11Crores and orovision to be made is ` 4 Crores.

Question 3

A contractor has entered into a contract fopr building roads for ` 2 crores. After completing 60%

of the contract he came to know that the cost of completing the contract would be 2.4 crores. The

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accountant transferred ` 0.24 crores i.e. 60% of the total loss of ` 0.40Crores to P&L Account in

the current year. Give your views on the above.

Answer:
No, the entire loss must be recognised in the Profit and Loss Account. The 60% of the loss must
be recognised as a loss i.e. 0.24 Crores and the remaining 40% of the loss i.e. 0.16 Crores must
be recognised as Provision for the loss.

Question 4

An amount of ` 9,90,000 was incurred on a contract work upto 31st March. Certificates have been

received to date to the value of ` 12,00,000 against which ` 10,80,000 has been received in cash.

The cost of work done but not certified amounted to ` 22,500. It is estimated that by spending an

additional amount of ` 60,000 (including Provision for Contingencies) the work can be

completed in all respects in another two months. The agreed Contract Price of the work is `

12,50,000. Compute a conservative estimate of the profit to be taken to the P & L A/c as per AS-
7.

Answer:

Profit to be recognised is ` 1,88,625.

Question 5
A company undertakes a number of Contracts. Following particulars are extracted in respect of
certain loss-making Contracts. Determine the amount of Expected Loss that should be

recognised in the accounts for the year. (in ` Lakhs)

Contract A B C D

Contract Price 15.00 12.50 87.50 10.00

Cost Incurred till date 12.00 10.90 2.50 6.00

Costs expected to be incurred to complete the Contract 4.00 3.60 88.00 4.00

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Answer:

Contract A B C D

Expected loss to be recognised 1.00 2.00 3.00 NIL

Provision to be made for the loss 0.25 0.50 2.92 NIL

Question 6
The following data is given for a financial period in respect of various contracts undertaken by

Daksha Ltd. (in ` Lakhs)

Contract A B C D E F

Costs incurred till date 40.00 10.00 6.00 75.00 40.00 120.00

Recognised Profits 6.00 Nil Nil Nil 8.00 11.00

Recognised Losses Nil 2.00 1.00 13.00 Nil Nil

Progress Billings 36.00 5.00 7.00 70.00 30.00 114.00

Determine the amount to be shown in the Balance Sheet for the above.

Question 7
Pinaki & Co. a Firm of Contractors, obtained a contract for cnstruction of bridges across the river
Revathi. The following details are available in the records kept for the year ending 31 st March.

(information in ` Lakhs)

Total Contract Price 1,000 Progress Payment Received 400

Costs incurred till date 605 Progress Payment to be Received 140

Estimated further cost to Completion 495

The Firm seeks your advice and assistance in the presentation of accounts keeping in view the
requirements of AS-7.

Answer :

Expected loss to be recognised is ` 100 Lacs.` 35 lacs will be shown as a liability.

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Question 8

Vishwakarma Ltd. undertook a Contract to construct a building for ` 85 Lakhs. At the end of the

financial year, the Company found that it had already spent ` 64,99,000 on Construction. Prudent

estimate of the additional cost for completion was ` 32,01,000. What is the additional provision

for foreseeable loss which must be made in the final accounts for the year ended 31st March? If

the progress billings received were ` 50 Lakhs on 31st March, what is the amount due from/to

customers?

Answer:

The amount due from the customer will be shown as an asset amounting to ` 2,90,000.

Question 9

Nilakanta Construction Co. Ltd. undertook a contract on 1st January to construct a building for `

80 Lakhs. The Company found on 31st March that it had already spent ` 58,50,000 on the

construction. Prudent estimate of additional cost for completion was ` 31,50,000.

What amount should be charged to Revenue and what amount of Contract Value to be
recognized as Turnover in the accounts for the year ended 31 st March as per provisions of AS-7?

Answer:

Loss to be rocognised on the contract is ` 650000 and provision to be made for the futher loss is `

350000.

Question 10
Trilochan Ltd. are Heavy Engineering Contractors specializing in construction of dams. Form the
records of the Company, the following data is available pertaining to year ended 31 st March.
Using this data and applying the relevant Accounting Standard you are required to –
(a) Compute the Amount of Profit/Loss for year ended 31st March.

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(b) Arrive at the Contract Work in Progress at the end of the above Financial Year.
(c) Determine the Amount of Revenue to be recognized out of the Total Contract Value.
(d) Work out the amount due from / to customers as at year-end.
(e) List down relevant disclosures with figures as per relevant Accounting Standard.

Total Contract Price ` 2,400 Crores Estimated Further Cost to ` 1,750 Crores
Completion

Work Certified ` 1,250 Crores Stage-wise Payments ` 1,100 Crores

received

Work pending ` 250 Crores Progress Payments in pipe ` 300 Crores

certification line

Answer:

Expected loss on the contract is 850 Crores. Gross amount due to the customer is ` 750 Crores.

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