The following expenditure was incurred on a contract of Rs 12,00,000 for the year ending 31-12-

2015

Particulars Amount

Materials 2,40,000
Wages 3,28,000
Plant 40,000
Overheads 17,200

Cash received on account of the contract to 31-12-2015., was Rs 4,80,000, being 80%
of the work certified. The value of materials in hand was Rs 20,000. The plant had
undergone 20% depreciation. Prepare Contract Account.
Solution:
In the books of Contractor
Contract A/C for the year ending 31-12-2015

Particulars Amount Particulars Amount

To Material 2,40,000 By Work-in-progress
To Wages 3,28,000 Work certified 6,00,000
To Plant 40,000 By Material in hand(closing) 20,000
To Overhead 17,200 By Plant (closing balance) 32,000
To Notional profit 26,800 (40,000 – 20%depreciation)
6,52,000 6,52,000
To P&L a/c 14,293 By Notional Profit 26,800
To Reserve (B/f) 12,507
26,800 26,800

Working:
80% of work certified = 4,80,000
Work certified = 4,80,000*100/80 = 600,000
Cash received = work certified x 80% = 600,000 * 80% = 4,80,000

Amount transferable to P& L a/c

% of work certified = work certified / Total contract price * 100
= 6,00,000 / 12,00,000 * 100 = 50%

P&L a/c = Notional profit * 2/3 * cash received / work certified

= 26,800 * 2/3 * 4,80,000/600,000 = 14, 293
Or
P&L a/c = Notional profit * 2/3 * cash ratio
 In the books of Contractor
Contract A/C for the year ending 31-12-2015

Particulars Amount Particulars Amount

To Material 2,40,000 By Work-in-progress
To Wages 3,28,000 Work certified 6,00,000
To Depreciation (40,000* 20%) 8,000 By Material in hand(closing) 20,000
To Overhead 17,200
To Notional profit 26,800
6,20,000 6,20,000
To P&L a/c 14,293 By Notional Profit 26,800
To Reserve (B/f) 12,507
26,800 26,800
 2. The Following expenses were incurred on an unfinished contract during the year 2013-
2014
Materials Rs 90,000
Wages Rs 60,000
Other expenses Rs 30,000
Rs 2,00,000 was received by the contractor, being 80% of the work done , but not
certified was Rs 5,000. Determine the profit to be credited to profit and loss account
and profit kept reserve in all the three alternatives given below :
(i) Contract price is RS 3,00,000
(ii) Contract price is RS 5,50,000
(iii) Contract price is RS 12,00,000

Solution:
In the books of Contractor
Contract A/C for the year 2013-2014

Particulars Amount Particulars Amount

Rs. Rs.
To Materials 90,000 By WIP
To Wages 60,000 Work Certified 2,50,000
To Other Expenses 30,000 Not certified 5,000

To Notional Profit 75,000

2,55,000 2,55,000

Notes:
Cash received = 2,00,000 = 80% of work certified
Work certified = cash received x 100 / 80 = 2,50,000

1. If contract price is Rs.3,00,000

Step 1: % of work certified = work certified / contract price * 100
= 2,50,000 / 3,00,000 * 100 = 83.33%
Under slab 3
Amount transferred to P&L A/c = Notional profit x 2/3 x cash ratio
= 75,000 x 2/3 x 80% = 40,000
Transferred to Reserve = (75,000 -40,000) = 35,000

2. If contract price is Rs.5,50,000

Step 1: % of work certified = work certified / contract price * 100

= 2,50,000 / 5,50,000 * 100 = 45.45%
Slab 2 is applicable
Amount transferred to P&L A/c = Notional profit x 1/3 x cash ratio
= 75,000 x 1/3 x 80% = 20,000
Transferred to Reserve = (75,000 -20,000) = 55,000

3. If contract price is Rs.12,00,000

 Step 1: % of work certified = work certified / contract price * 100
= 2,50,000 / 12,00,000 * 100 = 20.83%
Amount transferred to P&L A/c = NIL
Transferred to Reserve = 75,000
3. How much of profit, if any you would consider in the following
case: Contract price 20,00,000 Cost incurred 11,20,000
Cash received 10,80,000 = (100 – 10 ) = 90%
Work not certified 1,20,000 Deduction from bills by way of
security deposit is 10%. =
Solution:
In the books of Contractor
Contract A/C

Particulars Amount Particulars Amount

Rs. Rs.
To Cost Incurred 11,20,000 By Work in progress
Work certified 12,00,000
To Notional Profit 2,00,000 Work not certified 1,20,000

13,20,000 13,20,000
To P&L a/c 1,20,000 By Notional Profit 2,00,000
To Reserve a/c (b/f) 80,000
2,00,000 2,00,000
Note:
Work certified = cash received x (reverse of cash ratio)
= 10,80,000 x 100/90 = 12,00,000

% of work certified = work certified / contract price * 100

= 12,00,000 / 20,00,000 * 100 = 60%
Slab 3
Amount transferred to P&L A/c = Notional profit x 2/3 x cash ratio
= 2,00,000 x 2/3 x 90% = 1,20,000
Transferred to Reserve = (2,00,000 -1,20,000) = 80,000
% of work certified less than 25%
P&L a/c = Nil Reserve = 100% of notional profit

% of work certified 25% to less than 50%

Amount transferred to P&L A/c = Notional profit x 1/3 x cash ratio
Reserve = notional profit – P&L account

% of work certified 50% to less than 90%

Amount transferred to P&L A/c = Notional profit x 2/3 x cash ratio
Reserve = notional profit – P&L account

% of work certified 90% and above

P&L a/c = 100% of notional profit
Reserve = Nil
4. Thekedar accepted a contract for the construction of a building for Rs 10,00,000, the contractee
agreeing to pay 90% of work certified by the architect. During the first year, the amounts spent
were:
Material 1,20,000 Machinery 30,000
Labour 1,50,000 Other expenses 90,000
At the end of the year, the machinery was valued at Rs 20,000 and materials at site were of the
value of Rs 5,000. Work certified during the year totalled Rs 4,00,000. In addition work-in-
progress not certified at the end of the year had cost Rs 15,000. Prepare contract account in the
books of Thekedar. Also show the various figures that can be reasonably transferred to the Profit
and Loss Account.

Solution:
In the books of Contractor
Contract A/C

Particulars Amount Particulars Amount

To Material 1,20,000 By Work in progress
To Labour 1,50,000 Work certified 4,00,000
To Machinery 30,000 Work not certified 15,000
To Other expenses 90,000 By Machinery (closing bal) 20,000
To Notional Profit 50,000 By Material (closing bal) 5,000
4,40,000 4,40,000
To P&L a/c 15,000 By Notional Profit 50,000
To Reserve A/c (balance) 35,000
50,000 50,000
Working:
% of work certified = work certified / contract price *100
= 4,00,000 / 10,00,000 *100 = 40%
Amount transferred to P&L A/c = Notional profit x 1/3 x cash ratio
= 50,000 x 1/3 x 90% = 15,000
5. The BBA construction company undertakes large contracts. The following particulars
relate to contract No 125 carried out during the year ended on 31-3-2015.

Particulars Amount Particulars Amount

Work certified by architech cr 1,43,000 Wages accrued on 31-3-2015 -Dr 1,800

Cost of work not certified cr 3,400 Direct expenditure - Dr 2,400

Plant installed at site - Dr 11,300 Materials on hand on 31-3- 2015 -Cr 1,400

Value of plant on 31-3-2015 -Cr 8,200 Materials returned to store -Cr 400

Materials sent to site -Dr 64,500 Direct expenditure accrued on 31-3-2015 Dr 200

Labour - Dr 54,800 Contract price 2,00,000

Establishment charge - Dr 3,250 Cash received from contractee 1,30,000

Prepare a contract Account for the period ending 31-3-2015 and find out the profit. It was
decided to transfer 2/3 of the profit on cash basis to Profit and Loss account.

In the books of Contractor

Contract No. 125 A/c for the year ended 31st March 2015
Particulars Amount Particulars Amount
To Material sent to site 64,500 By Work-in-progress
To Wages/ Labour 54,800 Work certified 1,43,000
To Plant installed at sit 11,300 Work not certified 3,400
To Establishment charges 3,250 By Plant (closing bal) 8,200
To Wages accrued 1,800 By Material on hand (clo. Bal) 1,400
To Direct Expenses 2,400 By Material returned to store 400
To Direct Exp accrued 200

To Notional Profit 18,150

1,56,400 1,56,400
To P&L A/c 11,000 By Notional Profit 18,150
To Reserve A/c (b/f) 7,150
18,150 18,150
Workings:
% of work certified = Work certified / Contract Price *100 = 1,43,000 / 2,00,000 * 100
= 71.5%
Slab 3
Amount transferred to P&L A/c = Notional profit x 2/3 x Cash received/work cert.
= 18,150 * 2/3*1,30,000/1,43,000
= 11,000.