TOPIC – 13
ACCOUNTING STANDARS – 7
CONSTRUCTION CONSTRACTS
Index
Sr. Particulars Page No. of
No. No. Question
1 SERIES 100 – PRACTICAL QUESTIONS 13.1 9
2 SERIES 200 – CASE STUDIES BASED QUESTIONS 13.9 4
SERIES 100 - PRACTICAL QUESTIONS
Q.AS7.SM.101: (% of Completion)
X Ltd. Commenced a construction contract on 01/04/X1. The fixed contract price agreed was Rs.
2,00,000. The company incurred Rs. 81,000 in 20X1-X2 for 45% work and received Rs. 79,000 as
progress payment from the customer. The cost incurred in 20X2-X3 was Rs. 89,000 to complete
the rest of work. Show the Extract of the Profit and Loss A/c and Customer’s A/c for the related
years.
Q.AS7.SM.102: (% of Completion & Foreseeable Loss)
Show Profit & Loss A/c (Extract)in books of a contractor in respect of the following data.
Rs.000
Contract Price (Fixed) 600
Cost incurred to date 390
Estimated cost to complete 260
Assume that the contract period is 2 years. The contract is 100% completed by Year 2. Actual
costs incurred is the same as total estimated costs to complete (Cost incurred to date plus
estimated cost to complete).
Q.AS7.SM.103: (Foreseeable Loss)
On 1st December, 20X1, Vishwakarma Construction Co. Ltd. undertook a contract to construct a
building for Rs.85 lakhs. On 31st March, 20X2, the company found that it had already spent
Rs.64,99,000 on the construction. Prudent estimate of additional cost for completion was
Rs.32,01,000. What amount should be charged to revenue in the final accounts for the year ended
31st March, 20X2 as per provisions of Accounting Standard 7 (Revised)?
13.1
Q.AS7.SM.104: (% of Completion)
A firm of contractors obtained a contract for construction of bridges across river Krishna. The
following details are available for the year ended 31.3.04
Total Contract Price 1,000
Work Certified 500
Work not Certified 105
Estimated Further cost to Completion 495
Progress Payment Received 400
To Be Received 140
The firm seeks your advice and assistance in the presentation of accounts keeping in view the
requirement of AS 7.
Q.AS7.SM.105:(MTP Oct20 & May21) (% of Completion & Foreseeable
Loss)
Akar Ltd. Signed on 01/04/X1, a construction contract for Rs. 1,50,00,000. Following
particulars are extracted in respect of contract, for the year ended 31/03/X2.
- Materials used Rs. 71,00,000
- Labour charges paid Rs. 36,00,000
- Hire charges of plant Rs. 10,00,000
- Other contract cost incurred Rs. 15,00,000
- Labour charges of Rs. 2,00,000 are still outstanding on 31.3.X2.
- It is estimated that by spending further Rs.33,50,000 the work can be completed in all
respect.
You are required to compute profit/loss for the year to be taken to Profit & Loss Account and any
provision for foreseeable loss to be recognized as per AS 7.
Q.AS7.SM.106 (Contract Revenue)
AB contactors enters into a contract on 1st January 20X1 with XY to construct a 5-storied building.
Under the contract, AB is required to complete the construction in 3 years (i.e., by 31 st December
20X3). The following information is relevant:
Fixed price (agreed) ₹5crore
Material cost escalation (to the extent of 20% of increase in material cost) Labour cost escalation
(up to 30% of increase in minimum wages)
In case AB is able to complete the construction in less than 2 years and 10 months, it will be
entitled for an additional incentive of ₹ 50 lakh. However, in case the construction is delayed
beyond 3 years and 2 months, XY will charge a penalty of ₹ 20 lakh. At the start of the contract,
13.2
AB has a reason to believe that construction will be completed in 2 years and 8 months. Assume
that the construction was actually completed in 2 years 9 months.
Labour cost was originally estimated to be ₹1.20 crore (based on initial minimum wages). However,
the costs have increased by 25% during the construction period.
Material costs have increased by 40% due to short-supply. The total increase in material cost due
to the 40% escalation is ₹ 80 lakh.
You are required to suggest what should be the contract revenue in above case?
Assume that in year 20X2, XY has requested AB to increase the scope of the contract. An additional
floor is required to be constructed and there is an increase in contract fee by ₹ 1 crore.
AB has incurred a cost of ₹ 20 lakh for getting the local authority approvals which it will be entitled
to claim from XY in addition to the increase in the fixed fee.
Also measure the total contract revenue in this case.
Q.AS7.SM.107 (% of Completion)
RT Enterprises has entered into a fixed price contract for construction of a tower with its customer.
Initial tender price agreed is ₹ 220 crore. At the start of the contract, it is estimated that total costs
to be incurred will be ₹ 200 crore. At the end of year 1, this estimate stands revised to ₹ 202 crore.
Assume that the construction is expected to be completed in 3 years.
During year 2, the customer has requested for a variation in the contract. As a result of that, the
total contract value will increase by ₹ 5 crore and the costs will increase by ₹ 3 crore.
RT has decided to measure the stage of completion on the basis of the proportion of contract costs
incurred to the total estimated contract costs. Contract costs incurred at the end of each year is:
Year 1: ₹ 52.52 crore
Year 2: ₹ 154.20 crore (including unused material of 2.5 crore)
Year 3: ₹ 205 crore.
You are required to calculate:
(a) Stage of completion for each year.
(b) Profit to be recognised for each year.
Q.AS7.RMP.108: (Exam May 18 & May 23, MTP Nov21)
Sarita Construction Co. obtained a contract for construction of a dam. The following
details are available in records of company for the year ended 31st March, 2018:
Rs In Lakhs
Total Contract Price 12,000
Work Certified 6,250
Work not certified 1,250
Estimated further cost to completion 8,750
Progress payment received 5,500
Progress payment to be received 1,500
Applying the provisions of Accounting Standard 7 "Accounting for Construction Contracts" you
are required to compute:
(i) Profit/Loss for the year ended 31st March, 2018.
13.3
(ii) Contract work in progress as at end of financial year 2017-18.
(iii) Revenue to be recognized out of the total contract value.
(iv) Amount due from/to customers as at the year end.
Q.AS7.RMP.109: (RTP May’24) (% of Completion)
The following data is provided for M/s. Raj Construction Co.
● Contract Price - ₹ 85 lakhs
● Materials issued - ₹ 21 Lakhs out of which Materials costing ₹ 4 Lakhs is still lying
unused.at the end of the period.
● Labor Expenses for workers engaged at site - ₹ 16 Lakhs (out of which ₹ 1 Lakh is still
unpaid
● Further Cost estimated to be incurred to complete the contract - ₹ 35 Lakhs
● Specific Contract Cost – Rs. 5 Lakhs
● Sub-contract Cost (word done) – Rs. 7 Lakhs
● Advance to Sub-contractor – Rs. 4 Lakhs.
You are required to compute the Percentage of Completion, the Contract Revenue and Cost to be
recognized as per AS-7.
SOLUTIONS OF ABOVE QUESTIONS OF SERIES 100
SOLUTION Q101
Profit & Loss Account
Year Rs.000 Year Rs.000
20X1-X2 To Construction 81 20X1-X2 By Contract Price (45% of 90
Costs (for 45% Contract Price)
work)
To Net profit (for 9
45% work)
90 90
20X2-X3 20X2-X3
To Construction 89 By Contract Price (55% of 110
Costs (for 55% Contract Price)
work)
To Net Profit (for 21
55% work)
110 110
Customer account
Year Rs.000 Year Rs.000
20X1-X2 To Contract Price 90 20X1-X2 By Bank 79
By Balance c/d 11
90 90
13.4
20X2-X3 20X2-X3
To Balance b/d 11 By Bank 121
To Contract Price 110
121 121
SOLUTION Q102
Rs.000
A. Cost incurred to date 390
B. Estimate of cost to completion 260
C. Estimated total cost 650
D. Degree of completion (A/C) 60%
E. Revenue Recognised (60%of600) 360
Total foreseeable loss (650–600) 50
Less: Loss for current year (E–A) (30)
Expected loss to be recognised immediately 20
Profit & Loss A/C
Rs. Rs.
To Construction costs 390 By Contract Price 360
To Provision for loss 20 By Net Loss 50
410 410
SOLUTION Q103
Cost incurred till 31st March 20X1 64,99,000
Prudent estimate of additional cost of completion 32,01,000
Total Cost of Construction 97,00,000
Less – Contract Price 85,00,000
Total Foreseeable Losses 12,00,000
According to AS 7, the amount of ₹ 12,00,000 is required to be recognised as an expense.
Contract work in Progress = 64,99,000 x 100 / 97,00,000 = 67%
Proportion of total contract value recognised as turnover = 67% of 85,00,000 = 56,95,000
The amount of expected loss will be split as under:
Particulars Workings Amount
Expected Loss 97,00,000 – 85,00,000 12,00,000
Contract Revenue 67% of 85,00,000 56,95,000
Contract Cost Given 64,99,000
Actual Loss 56,95,000 – 64,99,000 8,04,000
Amount of Provision Required 12,00,000 – 8,04,000 3,96,000
SOLUTION Q104
(a) Amount of Foreseeable Loss
Total Cost of Construction (500+105+495) 1,100
Less: Total Contract Price (1,000)
Total foreseeable loss to be recognised as 100
expense
13.5
According to AS 7, When it is probable that total contract cost will exceed total contract revenue,
the expected loss should be recognised as an expense immediately.
(b) Contracts work-in-progress i.e., Cost incurred (₹ in lakhs)
to date are ₹ 605 lakhs
Work Certified 500
Work uncertified 105
605
This is 55% (605 / 1,100 x 100) of total cost of Construction
(c) Proportion of total contract value recognise as Revenue:
55% of ₹ 1,000 lakhs = ₹ 550 lakhs.
(a) Amount Due from/to Customers: (Contract Cost + Recognised Profits – Recognised Losses) –
(Progress Payments Received + Progress Payments to be received)
= (605 + Nil - 100) – (400 + 140)
= 505 – 540
Amount Due to Customers = ₹ 35 lakhs
(b) The relevant disclosures under AS 7 are given bellow:
Contract Revenue 550
Contract Expenses 605
Recognised Profits less Recognised Losses (100)
Progress Billing ₹ (400+ 140) 540
Retention (billed but not received from contractee) 140
Gross amount due to customers 35
SOLUTION: Q105
Statement showing the amount of profit/loss to be taken to Profit and Loss Account and
additional provision for the foreseeable loss as per AS 7
Cost of Construction Rs. Rs.
Material used 71,00,000
Labour Charges paid 36,00,000
Add: Outstanding on31.03.20X2 2,00,000 38,00,000
Hire Charges of Plant 10,00,000
Other Contract cost incurred 15,00,000
Cost incurred up to 31.03.20X2 1,34,00,000
Add: Estimated future cost 33,50,000
Total Estimated cost of construction 1,67,50,000
Degree of completion (1,34,00,000/1,67,50,000x100) 80%
Revenue recognized (80%of 1,50,00,000) 1,20,00,000
Total foreseeable loss (1,67,50,000-1,50,00,000) 17,50,000
Less: Loss for the current year (1,34,00,000-1,20,00,000) 14,00,000
Loss to be provided for 3,50,000
SOLUTION Q106
Total Revenue after considering the escalation costs, claims and incentives:
Fixed Price: 5.00 crore
Incentive for early completion 0.50 crore
Material costs recovery (to the extent of 20%) 0.40 crore
13.6
Labour costs recovery (Actual increase is less than 30%) 0.30 crore [1.20 crore x 25%]
Total Contract Revenue 6.20 crore
Add: Variation to the contract 1.00 crore
Add: Claims recoverable from XY 0.20 crore
Total Contract Revenue 7.40 crore
SOLUTION Q107
(a) Stage of completion = Costs incurred to date / Total estimated cost
Year 1 : 52.52 crore / 202 crore = 26%
Year 2: (154.20 crore – 2.50 crore) / 205 crore = 74%
Year 3: 205 crore / 205 crore = 100%
(b) Profit for the year
Year 1 Year 2 Year 3
Contract 57.20 crore 109.30 crore 58.50 crore
Revenue (1) (220 crore x 26%) (225 crore x 74% - (225 crore x 100% - 109.30
57.20 crore) crore – 57.20 crore)
Contract Cost 52.52 crore 99.18 crore 53.30 crore
(2) (202 crore x 26%) (205 crore x 74% - (205 crore x 100% - 99.18
52.52 crore) crore – 52.52 crore)
Contract Profit 4.68 crore 10.12 crore 5.20 crore
(1)– (2)
SOLUTION: Q108
(i) (Loss for the year ended, 31st March, 2018 (Rs in lakhs)
i
Amount of foreseeable loss
)
Total cost of construction (6,250 + 1,250 + 8,750) 16,250
Less: Total contract price (12,000)
Total foreseeable loss to be recognised as expense 4,250
According to AS 7, when it is probable that total contract costs will exceed total contract revenue,
the expected loss should be recognised as an expense immediately.
Loss for the year ended, 31st March, 2018 amounting Rs 4,250 will be recognized.
(ii) Contract work-in-progress as on 31.3.18 (Rs in lakhs)
Contract work-in-progress i.e., cost incurred to date are Rs 7,500 lakhs: 6,250
Work certified 1,250
Work not certified 7,500
(iii) Proportion of total contract value recognised as revenue
Cost incurred till 31.3.18 is 46.15% (7,500/16,250×100) of total costs of construction.
Proportion of total contract value recognised as revenue:
46.15% of Rs 12,000 lakhs = Rs 5,538 lakhs
(iv) Amount due from/to customers at year end
(Contract costs + Recognised profits – Recognised Losses) – (Progress payments received +
Progress payments to be received)
= (7,500 + Nil – 4,250) – (5,500 + 1,500) Rs in lakhs
= [3,250 – 7,000] Rs in lakhs
Amount due to customers = Rs 3,750 lakhs
13.7
SOLUTION: Q109
Computation of Contract Cost
₹ Lakh ₹ Lakh
Material cost incurred on the contract (net of closing stock) 21-4 17
Add: Labour cost incurred on the contract
(including outstanding amount) 16
Specified contract cost given 5
Sub-contract cost (advances should not be considered) 7
Cost incurred (till date) 45
Add: further cost to be incurred 35
Total contract cost 80
● Percentage of completion = Cost incurred till date/Estimated total cost
= ₹ 45,00,000/₹ 80,00,000
= 56.25%
● Contract revenue and costs to be recognized
Contract revenue (₹ 85,00,000x56.25%) = ₹ 47,81,250
Contract costs = ₹ 45,00,000
13.8
SERIES 200 – CASE STUDIES BASED QUESTIONS
Q.AS7.SM.201
PQ & Associates undertakes a construction contract the details of which are provided below:
Total Contract Value ₹40 lakh
Costs incurred to date ₹3 lakh
Estimated future costs of completion ₹30 lakh
Work completed 10%
The work has started some time ago and there is an uncertainty with respect to the outcome
of the contract due to expected changes in regulations. PQ is certain that it would be able to
recover the costs incurred to date.
Q.AS7.SM.202
It is argued that profit on construction contracts should not be recognised until the contract
is completed. Please explain whether you believe that this suggestion would improve the quality
of financial reporting for long-term construction contracts.
Q.AS7.SM.203: (Segmentation Criteria)
XYZ construction Ltd, a construction company undertakes the construction of an
industrial complex. It has separate proposals raised for each unit to be constructed in
the industrial complex. Since each unit is subject to separate negotiation, he is able to identify the
costs and revenues attributable to each unit. Should XYZ Ltd, treat construction of each unit as a
separate construction contract according to AS 7?
Q.AS7.RMP.204: (RTP May21)
a) Sky Limited belongs to Heavy Engineering Contractors specializing in construction of Flyovers.
The company just entered into a contract with a local municipal corporation for building a
flyover. No activity has started on this contract.
As per the terms of the contract, Sky Limited will receive an additional Rs. 50 lakhs if the
construction of the flyover were to be finished within a period of two years from the
commencement of the contract. The accountant of the entity wants to recognize this
revenue since in the past the company has been able to meet similar targets very easily. Give
your opinion on this treatment.
(b) ABC Ltd., a construction contractor, undertakes the construction of commercial complex for
13.9
XYZ Ltd. ABC Ltd. submitted separate proposals for each of 3 units of commercial complex. A
single agreement is entered into between the two parties. The agreement lays down the value
of each of the 3 units i.e. Rs. 50 lakh, Rs. 60 lakh and Rs. 75 lakh respectively. Agreement
also lays down the completion time for each unit.
Comment, with reference to AS 7, whether ABC Ltd., should treat it as a single contract or three
separate contracts.
SOLUTIONS OF ABOVE QUESTIONS OF SERIES 200
SOLUTION Q201
In the given case, revenue and costs can only be recognised to the extent of the costs incurred
and those which are expected to be recovered. Therefore, the profit & loss statement would
appear as under:
Contract Revenue ₹3 lakh
Contract Costs ₹3 lakh
Contract Profit Nil
When the uncertainties that prevented the outcome of the contract being estimated reliably
cease to exist, revenue and expenses associated with the construction contract should be
recognised by the percentage completion method.
SOLUTION Q202
Usually, construction contracts are long term nature i.e., the contracts are entered in one
accounting period, however, the work performed will flow into more than one accounting year. If
the profit on construction contracts is not recognised over the construction period, then the costs
incurred during the earlier years of the contract would be recognised without any corresponding
revenue. This will result in losses for initial years followed by high profits in future years.
The current treatment under AS 7 results in matching revenue and associated costs as they are
recognised during the same period. Also, the current accounting incorporates the prudence
concept as any foreseeable losses are accounted for immediately.
Therefore, AS 7 results in affair representation of the underlying financial substance of the
transaction.
SOLUTION Q203
As per AS 7 ‘Construction Contracts’, when a contract covers a number of assets, the construction
of each asset should be treated as a separate construction contract when:
(c) Separate proposals have been submitted for each asset;
(d) Each asset has been subject to separate negotiation and the contractor and customer have
been able to accept or reject that part of the contract relating to each asset; and
(e) The costs and revenues of each asset can be identified.
13.10
Therefore, XYZ Ltd. is required to treat construction of each unit as a separate construction
contract.
SOLUTION Q204
(a) According to AS 7 ‘Construction Contracts’, incentive payments are additional amounts payable
to the contractor if specified performance standards are met or exceeded. For example, a contract
may allow for an incentive payment to the contractor for early completion of the contract. Incentive
payments are included in contract revenue when both the conditions are met:
(i) The contract is sufficiently advanced that it is probable that the specified performance
standards will be met or exceeded; and
(ii) The amount of the incentive payment can be measured reliably.
In the given problem, the contract has not even begun and hence the contractor (Sky Limited)
should not recognize any revenue of this contract. Therefore, the accountant’s contention for
recognizing Rs. 50 lakhs as revenue is not correct.
(b) As per AS 7 ‘Construction Contracts’, when a contract covers a number of assets, the
construction of each asset should be treated as a separate construction contract when:
(a) separate proposals have been submitted for each asset;
(b) each asset has been subject to separate negotiation and the contractor and customer have
been able to accept or reject that part of the contract relating to each asset; and
(c) the costs and revenues of each asset can be identified.
ABC Ltd. has submitted separate proposals for each of the 3 units of commercial complex. Also,
the revenue and completion time has been laid down for each unit separately which implies
separate negotiation for them.
Therefore, ABC Ltd. is required to treat the construction of each unit as a separate construction
contract as the above-mentioned conditions of AS 7 are fulfilled in the given case.
13.11
Student Notes: -
13.12
