Professional Documents
Culture Documents
CONTRACT ACCOUNT
Contract No. ...... for the year ended
Contract
Pafticularc Rs. Pafticularc Rs.
To Materials (Issued) By Work in Progress:
To Wages (Paid + Payable) -
Work Certified
To Direct Expenses -
Work Uncertified
To Indirect Expenses By balances c/d:
To Sub{ontract Costs - Materials at Site
To Cost of Etra Work - Plant (WDV) at site
To Plant (at Cost)
To Notional Profit - balancino fioure
Total Total
To Profit and Loss Account - transfer of By Notional Profit bld
profits recognised during the period
To Reserve Profit - balancino fioure
Total Total
To Work in Progress b/d By Reserue Profit b/d
To balances b/d
- Materials at Site
- Plant at Site
The Contract Account is generally prepared in three segments. They are -
1. First Segment: Initial Comparison of Incomes & Expenditures for the period, leading to Notional Profit.
2. Second Segmenh Recognition and Transfer of a portion of Notional Profit to P & L Account and the balance carried
forward as Reserve Profit.
3. Third Segments Carry forward of balances from one financial period to another. Hence Third Segment of the previous
period becomes the First Segment of the next financial period. [Note that the Third Segment is not totalled, it is only
the carry forward of account balances from one period to the other.
6.19
Students'Handbook on Cost Accounting and Financial Management
A Contract is estimated to be 80% complete in its first year ol construction as certified. The Contractee pays 75o/o ol Value of
Work Certified, as and when certified and makes the final payment on the completion of contract. The lollowing information is
available for the first year -
. Cost of Work -in-Progress Uncertified Rs. 8,000
o Profit transferred to Profit & Loss A/c at the end of Year I on incomplete contract Rs.60,000
. Cost of work to date Rs.88,000
Calculate the Value of Work-in-Progress Certified and ahe amount of Contract Price.
Solution:
Cash Re ceived
1. Since contract is 800/o complete, Profit transferred to P & L A/c ,3= Z x Notional Profit x Work Certified
r\
So, Rs.60,000 = 1x Notional Profit x75o/o (i.e. Percentage of Cash Received to Work Certifled is 75olo given)
2. Notional Profit = Work Ceftified + Work Uncertified less Cost of work done till date
Rs.1,20,000 = Work Certified + Rs.8,000 - Rs.88,000
On solving the above, we get Work Certified = Rs.2rOOrOOO.
3, o/oaQ€ of Completion =
Work Ceftified Rs.2,00,000
= 8oo/o. so, contract price =
Rs'?'-0-g'000
= Rs.2rsorooo.
Contract Pr ice Contract Pr ice 80o/o
Solution: st
l.ContractAccountforthevearended3l*March
Particularc Rs. Pafticularc Rs.
To Materials 35,82,600 By Work in Progress A/c
To Direct Wages Paid 32,62,700 Rs'71'91'ooo
Add: -work certified ( ))
Payable_Z&lZQ 33,40,820 90o/o 79,90,000
To Direct Expenses Paid 1,68,000 -Work Unceftified 3,17,000
Add: Payable 9,310 1,77,310 By Materials - returned to Stores L4,84iO
To Planning and Estimation 3,50,000 By Materials at Site 85,400
To Cost of Plant installed at site 7,00,000 By WDV of Plant at site 6,16,000
To Establishment Expenses 2,03,000
To HO expenses - appoftioned 2,50,000
To Notional Profit - balancino fioure 4,19,510
Total 90,23,240 Total 90,23,240
6.20
Particularc Rs. Pafticularc Rs.
To P & L,Vc - Profit transfer - See Note b 2,51,706 By Notional Profit b/d 4,19,5t0
To Reserve Profit c/d - balancinq fiqure 1,67.804
Total 4,L9,sLO Total 41191510
To Work-in- Progress b/d (WC+WUC) 83,o7,ooo By Reserue Profit b/d 1,67,804
To WDV of Plant at site b/d 6,16,000
To Materials at Site b/d 85.400
Notes:
(b) So, Profittrfd to P&L *r= tx Notionat Profit xffiffi =3x Rs.4,1e,510 x-S### = Rs.2,51,706
Modern Constructions Ltd obtained a contract No.B-37 for Rs.40 Lakhs. The following balances and information relates to the
contract for the veat iust ended -
Particulars At the beqinnino ol the vear Rs. At the end of the vear Rs.
Work-in-Progress: Work Certified 9,40,000 30,00,000
Work Uncertilied 11,200 32,000
Materials at site 8,000 20,000
Accrued Waqes 5,000 3.000
The Contractee pays 80o/o of Work Certified in cash. You are required to prepare -
o Contract Account showing clearly the amount of profits transferred to Profit and Loss Account,
r Contractee's Account, and
o Balance Sheet.
6.21
Students'Handbook on Cost Accounting and Financial Management
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6.22
Contract Costinq
WI{ 1:
Item Material Issued Labour OH Plant at Cost
Ratio 5 4 2 4
Amount (Rs.5,60,000 x 514) = (Rs.5,60,000 x 414) = (Rs.5,60,000 x 214) = Rs.5,60,000 Computed
Rs.7.00.000 Rs.5.60.000 Rs.2.80.000 usino Deorn Rate & WDV
2. WIP Account
Particularc Rs. Pafticularc Rs.
To Contract Ay'c - Work Certified 1g,oo,ooo
To Contract A,/c - Work Uncertified 1.40.000 By balance c/d 19.40.OO0
Total 19,40,000 Total 19,40.000
3. Contracteet Account
Pafticularc Rs. Particulars Rs.
To balance c/d 16,2o,OOO Bv Bank (oiven) 16,20,000
20
Students'Handbook on Cost Accountinq and Financial Management
Prepare the Contract Account for the financial year ended 31st December and show the amount of profit or loss to be
recognised on this contract. Also show the summary entries in the Balance Sheet.
Solution:
Note: In this question, cost of work uncertified is not given. However, total work done is 213'd or 66.670/o, while extent of
certification is 50o/o. Hence balance !6.670/o constitutes work done but not certified. This should be computed on
proportionate cost basis in the following manner.
So, Proportionate Cost of t6.67o/owork done (i.e. Uncertified Work) = Rs.10,49,000, Rs.2,62,250. .
YOUr,o=
(c) Percentage of Compleuon = *q!9P =5oo/o(given)
Contract Pr ice
6.24
Contract Costing
i,:::l,::,
on 1st
October. On 31st December. when their accounts were made up, the was as follows -
Contract 1 2 3
Contract Price 2,00,000 1,35,000 1,50,000
Expenditure: Materials 39,400 29,000 10,000
Wages 63,250 56,200 7,000
General Expenses 2,000 1,400 500
Plant installed 10,000 8,000 6,000
Materials on hand 2,000 2,000 1,000
Wages accued 1,725 1,900 800
General Expenses accrued 300 200 100
Work Certified 1,20,000 80,000 19,000
Cash Received in respect thereof 90,000 60,000 13,500
Work linished but uncertified 3,000 4.000 1,050
Contract t had been negotiated two years back with an escalation clause providing that should Material Prices and Wage Rates
increase by more than 2.5olo, the Contragleg would increase the Contract Price by 207o ol the rise in the cost of materials and
40% of the rise in the wage rates beyond 2.5o/oin each case.
It is agreed that since the signing of the agreement the Material Prices had gone up by 107o and Wage Rates by 15%, the value
of Work Certified does not take into account the etfect of the escalation clause.
The Plant was installed on the dates of the contracts and depreciation is taken at 10o/o per annum. Prepare the respective
accounts in the Contract Ledger and give suitable entries in the Company's Balance Sheet.
Solution:
1. Computation of Escalation Claim
Note: Escalation Clause is applicable only for Contract No.1. The escalation claim is computed as under -
(a) Materials
No claim Escalation Claim = 2oolo of this differcnce
6.25
Students'Handbook on Cost Accounting and Financial Management
2. of on Plant used
Contract Number 1 2 3
(a) Value of Plant (Rs.) Rs.10,000 Rs.8,000 Rs.6,000
(b) Period of use ls Jan to 31* Dec = 12 mths ls July to 31* Dec. = 6 mths ls oct to 31st Dec. = 3 mths
(c) Depreciation at 100/o p.a Rs.1,000 Rs.40O Rs.15O
4. Profit
Contract Number I 2 3
(a) Notional Profit las oer Contract fucl 20.660 (3,000) 1,500
(b) o/o Work Certified
of completion = 600/o 59o/o LZo/o
Contract Pr ice
(3,000) Loss fully Less than 25olo
(c) Profit Recognised Z x 20,660 x 75o/o= 10,330
written off complete, so ignored.
6.26
Contract Costing
Solution:
Particularc Year 1 Year 2 Year 3
1. Income: (a) Work Certified Nil 3,00,000 8,00,000
(b) Work Uncertified s0,000 10,000 20.000
Total Income 50,000 3,10,000 8,20,000
2. Cost of work till date s0.000 2,30,000 6,60,000
3. Notional Profit (1 - 2) Nit 80,000 1,60,000
o/o
Work Ceftified Nil Rs.3,00,000 Rs.8,00,000 g0o/o
4. of Completion = = 30o/o =
Contract Pr ice Rs.10,00,000 Rs.10,00,000
5. Transfer to P&L A/c Nil ! xNotional *r cash Received l xNotional Pftx
Cash Re ceived
{based on Notional Profit formula) 3 Work Certified 3 Work Certified
(Note: Since question specifies
Estimated Total Profit 20o/o, i.e. = = !x ns.8o.ooo * Rs.3,00,000
Rs'2'75'ooo Rs'7'50'ooo
=33x 1.6o.o00x Rs.8,00,000
Rs.2,00,000, ETP can also be used for
3
Profit Recoqnition.) = Rs.2LM4 = Rs.1r00r0OO
(d) ErP x
Cost till date x- Cash Re ceived = 2.00 x
2'30 x2'75
= 2.oo x
6'60 \ 2'75
Estimated Total Costs Work Certified 8.00 3.00 8.00 3.00
= Rs.52,708 = Rs.1,51,25O
Since the above amounts are higher than the profits computed based on Notional Profiits, on prudence / conservatism basis,
the amounts shown at Point 5 above shall be transferred to P&L A/c.
Solution:
WorkCeftified Rs.27,50,000
1. Percentage of Completion -Contract Pr ice Rs.32,50,000 = 84.620/o
5.27
Students'Handbook on Cost Accounting and Financial Management
Paramount Engineers are engaged in construction and erection of a bridge under a long-term contract. The cost incurred upto
31st Mareh was as under:
Fabrication Costs: Direct Materials Rs.280 Lakhs
Direct Labour Rs. 100 Lakhs
Overheads Rs. 60 Lakhs
Total Fabrication Costs Rs. 440 Lakhs
Add: Erection Costs Rs. 110 Lakhs
Total Costs to date Rs.550 Lakhs
The Contract Price is Rs.11 Crores and the cash received on account tillSlst March was Rs.6 Crores. Work Certified till g13r
March was however Rs.6.80 Crores.
A technical estimate of the contract indicate the following degree of completion of work -
Fabrication: Direct Material-70o/o, Direct Labour and Overheads - 600/o. Erection - 40%.
Estimate the profit that could be taken to Profit & Loss A/c against this partly completed contract as at 31sr March.
1oo'oo
Labour 100.00
600/o
= 166.67
60'00
Overheads 60.00
600/o
- 1oo.oo
110'oo
Erection 110.00
40o/o
= 27s.oo
ol x Notional Profit x
Cash Re ceived
Work Certified
2
3
x 13o.oo x 600'00 = 7G.47
680,00
Obseruation: Least of the above is Rs.76.47 Lakhs (6m formula listed above). Hence, Profit recognised on prudence
basis is Ps.76.47 Lakhs. The balance Reserve Profit is (Rs.130.00 - Ps.76.47) = Rs.53.53 Lakhs.
As soon as materials are delivered to the site, they are charged to the Contract Account. A record is also kept ol materials as
they are actually used on the contract. Periodically a stock check is made and any discrepancy between Book Stock and
Physical Stock is transferred to a g.eneral "Contract Material Discrepancy" Account. This is absorbed back to each Contract,
cunently at the rate of 0.5% of Materials booked. The stock check at the year+nd revealed a Stock Shortage of Rs.5,000.
In addition to Direct Charges listed above, general 0H are charged to contracts at 5olo of value of Work Certified. General 0H of
Hs.l5,000 had been absorbed into the cost of work completed at the beginning of the year. lt has been estimated that further
costs to complete the contract will be Rs.2,20,0fi1. This estimate included the cost ol materials on site at the end of the year
lust finished and also a provision for rectification.
Required:
1. Determine the profitability of the above contract and recommend how much profit (to the nearest Rs.000s) should be taken
lor the year just ended.
2. State how your recommendation in (1) would be atfected if the Contract Price was Rs.40 Lakhs (rather than Rs:25 Lakhs)
and if no estimate has been made of costs to completion. Assume Retention Money = 2trlo.
6.29
2. of Profit on basis Rs.OOOs
Work Ceftified _22,00
A. Percentage of Completion
Contract Pr ice 25,00 = 88o/o
B. Current Year Profit = as per Contract A,/c above 4.67
C. Cost till date = as per Conkact Iy'c above
= WC + WUC - Notional Profit = 22,00 + 40 - 4,61 17.73
Contract Price 25,00
D. Estimated Total Profit (ETp) Less: Estimated Total Costs (a) Cost till date (17,73)
(b) Fufther Costs qiven (2.00) 5,07
E. Profit to be transferred to p&L Least
= of the followinS (a) to (c) 4,tl
(a) Estimated Total Profit x Work Certified
Contract
Cost"r'tce
till date
= 5,07
"ffi = 4,46
6.30
a
W{lti..**
RST Construction Ltd commenced a contract on lst April 2$g. the
.:.'.,, ":.:-.,,"; :...:,frli:i$l#
torai-Cd;iraci",wa-Ji6;iiiig"2iJi5.""iifi;"iitdiJ& to
estlmate the Total Profit on the contract and to take to the credit of P & L Account that proportion of estimateO profft
on castr
basis, which the work completed bore to the total contract. Actuat expenditurc for ure peri&i rJapiu
aioiilo ifi-r,ii,iir ioro
and estimated expenditule for la April 2010 to 3$ september 2010 are qiven below
Particulars lst Apr 2009 to 31* Mar 2010 1* Apr 2010to illh Sep 2010
(Actuals) ( (Estimated) (Hs.)
ilateriaF lssued 7,76,250 12,99,375
l-abour: Paid 5,17,500 6,19,750
Prepaid 37,500
Plant purchased
Outstanding 12,500 5,d
4,00,000
Plant Returns to Store (Historica! Cost) (0n 30u Sept 2(X)9) 1.00.000 (On 30tr Sept 201013.00.000
6.31
Students'Handbook on Cost Accounting and Financlal Management
Particulars lsr Aor 2009 to 31sr Mar 2010 1st Aor 2010 to 3@ Sep 2010
Expenses: Paid 2,25,000 3,75,000
Outstanding 25,000 10,000
Prepaid 15,000
ItUork Certified 22,50,000 trl
Work Uncertified 25,000
Cash received 19,75,000
Material at site 82.500 42.500
@depreciational25%onWDVMethod.TheContractislikelytobecompletedon30tttSep2010.
Required: Prepare the Contract Account. Determine the profit on the contract for the year 200$'2010 on prudent basis, which
has to be credited to P & L Account.
Solution: 1. Statement of Tr
Pafticularc Till date Additional Total
A, Income:
Work Certified Given = 22,50,000 Given = 49,21,875
Work Uncertified Given = 25,000
Total 22,75,OOO 49,21,875
B. Expenditure:
Materials (WN a) 6,93,750 13,39,375 20,33,L25
Labour ,(WN b) 4,92,500 6,49,500 tL,42,000
Expenses (WN c) 2,35,000 3,75,000 5,10,000
Deoreciation (WN d) 87.500 28.125 1.15.625
Total 15,08,750 23,92,OOO 34,OO,75O
C. Profit (A - B) 7,66,250 10,21rtAs
Notional Profit Estimated Total Proft
D. Profit transfer to P&L A/c (based on formula specified in the question)
work certified . Work Et:Y"g E'2?80'009 , B!92!499 Rs.3,8e,o(x!
Estimatedrotatprofitx
Contract Price i?tl =Rs.10,21,12s
Certified " Rs.49,21,875 Rs.22,50,000 =
1$ Aor 2OO9 to 31s Mar 2010
Opening Stock+Issues - Closing Stock = Opening Stock + Issues - Closing Stock =
Nil + 7,76,250 - 82,500 = 6,93,750 500 + 12,99,375 -
Paid + O/S at end - Prepaid at i:nd = Prepaid of previous period + paid during the.year'+
5,17,500 + 12,500 - 37,500 = 4,92,500 O/S at end - O/s at beginning =
Paid + O/S at end - PrePaid at end = Prepaid of previous period + paid during the year +
2,25,000 + 25,000 - 15,000 = 2,35,000 O/S at end - O/s at beginning =
000+10,000-25,000=3
3,00,000 x25o/ol,l2 rnontl^rs = 75,000 (3,00,000 - 75,000) x 25o/o x 5 months = 28,125
1,00,000 x25o/ox 6 months = 12,500
6.32
:;:ff, I.,i
AKP Builders Ltd commenced a contract on 1.r April zoog. ffre Total contrqgl_rryas tor Rs,5sg,000. Actual rrf.noitrr. til; f*
stApril 2008 to 31st March 2009 and estimated erpenditure for lst
April 2009 to 31st December 200g are qiven below-
Particulars 2008-2009 (Actual) 2009-2010 (9 months) Gstimated)
Material issued Rs.90,000 Rs.8!i,750
Labour: Paid Rs.75,000 Rs.87,325
Outstanding at the end Rs.6,250 Rs.8,300
Plant Rs.25,000
Sundry Expenses:Paid Rs.7,250 Rs.6,875
Prepaid at the end Rs.625
Establishment Charqes Rs.14.625
A part of the material was unsuitable and was sold for Rs.18,125 (Cost being Rs.15,000) and a part of PIant was soapped and
disposed of for Rs.2,875. The value ol Plant at Site on 31"t March 2009 was Rs.7,750 and value of Material at Site was Hs.4,250.
Cash received on account to date was Rs.l,75,000, representing 80o/o of the Work Certified. The cost of Work Uncertified was
valued at Hs.27,375.
The Contractor estimated further expenditure that would be incurred in completion of the conlract as under
-
o The Contract would be completed by 31st December 200g.
o A further sum of Rs'31,250 would have to be spent on the Plant and the Residual Value of the Plant on the completion of
the contract would be Rs.3,750.
. Establishment Charges would cost the same amount per month as in the previous year.
. Rs.10,800 would be sutficient to provide for contingencies.
Prepare Contract Account and calculate Estimated Total Profit on this contract. Prolit transferable to Profit and Loss Account
is to be calculated by reducing Estimated Profit in proportion of Work Certified and Contract price.
(d) Depreciation
= 7,250 - 625 = 6,625 ill?,5:";[
Cost - Disposed - Residual Value Opening Value + Purchases - Residual Value
= 25,000 - 2,875 - 7,750 = 14,375 = 7,750 + 31,250 - 3,750 = 35,250
6.33
Students'Handbook on Cost Accounting and Financial Management
2, for the
Particularc Rs. Pafticularc Rs.
To Material Issued 90,000 By Work in Progress
To Labour (as per WN above) 81,250 -Work Certified 2,L8,750
To Expenses (as per WN above) 6,625 -Work Unceftified 27,375
To Plant at Cost 25,000 By Bank - Sale Value of Plant sold 2,875
To Establishment Charges L4,625 By Bank - Sale Value of Materials sold 18,125
To P&L Iy'c - Pft on Sale of Matls. 3,125 -
By balance c/d Materials at Site 4,250
To Notional Profit 58.500 By balance c/d - Plant at Site 7,750
Total 2,79,L25 Total 2,79,L25
To Profit & Loss A/c - Transfer 29,960 By Notional Profit b/d 58,500
To Reserue Profit dd 28.540
Total 58,50O Total 58,500
To WIP bld (2,18,750 + 27,375) 2,46,125
By Reserue Profit b/d 28,540
To Materials at sitb b/d 4,250
To Plant at Site b/d 7.750
Note: Plant scrapped & disposed off for Rs.2,875 is assumed to be at cost. So, Loss / Gain thereon is ignored.
oe{€bil Fofr - M
ftcognfrion - Disp@ d ilateriab afr a Loes
Dick and Harry, undertook a contract for construction of a cycle shed for a sum of Rs.l,fl),fi[ . The work was started
on 1* April, 20X1 and the following expenses were incurred:
Plant - Rs.S,fi)O, Stores - Rs.l8,fiXt, Wages - Rs.16,250, Sundry Expenses - Rs.l ,325, Establishment Charges: Rs.2,925
Materials costing Rs.3,0(X) were found to be unsuitable for the contract and werc immediately sold for Rs.2,625.
The vatue ol Plant on 31tt March 20)P, was Rs.1,550 and of Stores Rs.850. Cash received on account was Rs.35,{X}0
reprcsenting 807o of the work certified. The work uncertified was valued at Rs.5,475 and this was certified later for Rs.6,250.
The Fhm decided to estimate the further expenditure on completion of the contract and tO take to the credit of P&L A/c for
20X1-X2, that portion of the total estimated profit, which the work certified, bore to the total contract price.
Preparc Contract, Stores and Plant Account for the year ended 31st March 20X2 and also show your calculations for the amount
credited to Profit & Loss Account lor the year.
6.34
Pafticularc Till date Additional Total
Sub--Total Cost excluding Contingencies 38,100 46,6t9 84,719
Add: Contingencies (2.5o/o of Rs.84,719) 2,118 2,t18
Total 38,100 48,737 86,8,37
C. Profit (A - B) tL,125 13,163
NotionalProfit Estimated Total Profit
D. Profit transfer to P&L A/c (based on formula specifled in tne question)
rotatprofitx ,.
Estimated
##F =Rs.13,163
ffi = Rs.5,75e
Notes:
Particulars Incurred till date Additional
(a) Materials Issued - Sold - Closing Stock Opening Stock + Purchases
= 18,000 - 3,000 - 850 = 14.150 = 850 + 17,150 = 18.000
(b) Establishment Charoes Rs,2,925 (qiven) for 12 months Rs.2,925 x 9112 = Rs.2,194 for 9 months
(c) Depreciation Cost Less Residual Value Opg Balance + Purchases - Residual Value
-
= 5,000 1,550 = Rs.3,450 = 1,550 + 6,250 - 750 = Rs.7,050
2. Contract Account for ended 31 20x2
Particulars Rs. Particularc Rs.
To Materials Issued 19,000 By Work-in-Progress - Work Ceftified 43,750
To Wages 76,250 - Work Uncertified 5,475
To Sundry Expenses 1,325 By balances c/d - Plant 1,550
To Establishment Charges 2,925 - Materials 8s0
To Plant 5,000 By Bank - Sale Value of Material Sold 2,625
To Notional Pr6nt c/O 11,125 By P & L (Loss on Materials) (3.000 - 2.625\ 375
Total 51,625 Total 5L,625
To P&L Ay'c - Profit transfer as per WN 1 above 5,759 By Notional Profit c/d 11,125
To Reserve Profit c/d - balancino fiqure 5.366
Total tL,L25 Total 11,125
To WIP b/d (WC + WUC) (43,750 + 5,475) 49,225 By Reserve Profit b/d 5,356
To Plant at Site b/d 1,550
To Materials at site b/d 8s0
Note:LossonSaleofMaterialwillbedebitedseparatelytoP&
Rs.6,250 will be considered in the subsequent period,s accounts.
l::.il*
st March
J uncoiipleteo ;;;ii.Li;'iJ'ffi
31rt
Particulars / Contract No. 723 726 729 731
TotalContract Price B.2A 14.4(l 10.08 28.80
Estimated TotalCosts on the Contract 20.50 11.52 12.60 21.60
Expenses for the year ended 31st March
Direct Materials 5.22 1.80 1.98 0.80
Direct Wages 2.32 4.32 3.90 2.16
Overheads (excluding Depreciation) 1.06 2.60 2.62 1.05
Profit Reserve as on lst April(beginning) 1.50
Plant issued at Cost during the year s.00 3.50 2.75 3.00
Materials at Site as at 1s April (beginning) 0.75
Materials at Site as at 31st March (end) 0.45 0.; 0.; 0.;
Value of Work Certified on 1st April (beginning) 4.75
Work Certified during the year 12.76 13.26 7.56 4.32
Work Uncertified as on 31st March (end) 0.84 0.24 0.14 0.18
Progress Payments received durinq the vear 9.57 9.00 5.75 3.60
Depreciation atzcflh per ann
remaining contracts were started in the la week of April this year. Determine the Profit / Loss in respect
ol each contraA for
the year ended 31st March. Also prepare the Contract Account.
6.35
Students'Handbook on Cost Accounting and Financial Management
Solution: 1. Contract Account for the vear ended 31o March (in Rs.Lakhs
Pafticularc 723 726 729 731 Total Particulars 723 726 729 73L Total
To WIP b/d 4.75 4.75 By Reserue b/d 1.50 1.50
To Materials b/d 0.75 0.75 By WIP a/c
To Materials 5.22 1.8; 1.9; 0.8; 9.80 -Work Certified 17.5r 13.26 7.56 4.32 42.65
To Wages 2.32 4.32 3.90 2.L6 12.70 -Wort Uncertified 0.84 0.24 0.14 0.18 1.40
To OH 1.06 2.60 2.62 1.05 7.33 By balance c/d
To Depreciation 1.00 0.70 0.55 0.60 2.85 *Materials 0.45 0.20 0.08 0.0s 0.78
on Plant at'20o/o
To Notional Pft {d 5.20 4.28 9.48 Bv Loss c/d t.27 0.06 1.33
Total 20.30 L3.70 9.05 4.61 47.66 Total 20.30 L3.70 9.05 4.61 47.66
To Loss b/d t.27_ 0.06 1.33 By Notional 5.20 4.28 9.48
To P&L - Pft tfr 1.3; 1.5; 2.86. Profit b/d
To Reserve Pft dd 3.90 2.72 6.62 By P&L - Loss tfr 2.52 0.05 2.58
To Provision c/d t.25 r.25
Total 5.20 4.24 2.s2 0.06 12.06 Total 5.20 4.24 2.52 0.06 12.06
Note:
o Profit/ (Loss) to be transferred to P&L A/c is determined on prudence basis, as per WN 2 below.
. In respect of profit-making contracts, the balance profit is called "Reserve Profit', while in respect of loss-making
contracts, the balance is called "Provision against Future Losses" (or) "Reserve for Contingencies". Both Reserve and
Provision constitute Credit balances, and are treated in the same way while disclosing WIP in the Balance Sheet.
. In Contract 729, Current Loss is 1.27 whereas the Worst Loss of 2.52 is to be provided for. The balance 1.25 constitutes
provision for foreseen losses and is hence carried forward as "Provision" (not Reserve Profit).
o Total Column is only for information value.
2. of on
Contract Number 723 726 729 73L
(a) Contract Price 23.20 74.40 10.08 28.80
(b) Work Certified (cumulative) t7.5t 13.26 7.56 4.32
For Contract No.723 and 726. least of the followinq is transferred to P&L A,/c (on conseruatism
Formula Contract 723 Contract 726
Work Certified xt7'51 = 2,oq
(a) ETP x 2.70 2.88xL3'26 =2.6s
Contract Pr ice 23.20 L4.40
(b) ETP x
Work Certified
x- Cash Re ceived 2.70x17'51 x 9'57 =1.53 2.88x13'26x
9'oo
Contract Pr ice Work Ceftified 23.20 t2.76 t4.40 13.26
=t.80
Cost till date 9'22
(c) ETP x 2.70x13'15 =t.73 2.88x =2,3o
Estimated Total Costs 20.50 11.52
(d) ETP x
Cost till date x-Cash Re ceived 2.70x13'15 x 9'57 =1.30 z.BB, 9'22 x 9'oo = 1.56
Estimated Total Costs Work Ceftified 20.50 12.76 11.52 L3.26
Work Ceftified
(e) Notional Profit x 5.2oxt7'51 =g,g2 4.28 x13,26 _ 3.g4
Contract Pr ice 23.20 t4.40
ff) NotionalProfit x
Cash Re ceived ?x5.20x9'57 =2.60 ?xc.28x 9'oo =4.35
1" Work Certified 3 t2.76 3 13.26
Note: In the above formulae -
. In Formula (c) and (d), Cost till date = WIP (WC + WUC) less Notional Profit, as per Contract A/c.
6.36
Contract Costinq
. For calculating percentage of completion, i.". cumulative Work Certified should be mnsidered (i.e.
#m,
including Opening balance of work certified.). However, for considering the percentage of payment,
.i.e. Cash Re ceived Cash Received during that year should be compared with Work Ceftified during
W;rk-Grtitu;, that year (i.e.
The agreed retention is 10% of the Value of Work Certified by the Contractee's Architect. Contract C is scheduled to be handed
over to the Contractee in the near future. lt is estimated that Rs.3,05,000 shall be needed to be spent in addition to what has
been tabulated above, to complete this particular contract. This amount includes an altowance for plant depreciation,
construction services and for contingencies.
Prepare Contract A/cs for each of the three contracts and recommend how much Profit / Loss should be recognized for the year.
6.37
Students'Handbook on Cost Accounting and Financial Management
I{ote: Since no profit has been previously recognized on Contract A, Value of Work Certified till last Y€or = Cost of Rs3,18
as given in the Question. For Contract C, value of Work Certified = C,ost of Work Certified + Profit recognized last
Y€or=8,!4+35=8,49.
2. of for of ProfIt or on ConfacB
Pafticularc A B c
2'oo 8'60 21'oo
A. Percentage of Completion =
Work Certified
- 11.360lo - 57.9to/o
24,20
- 86.770/o
Contract Pr ice 17,60 14,85
B. Current Year Profit (as per Contract A/c) L7 Loss (55) 4,LL
Nit (ss) Based on Prudence,
C. Profit to be transfened to P&L (< 25o/o complete) Cunent Loss shown below.
Estimated Total Costs = Costs till date (as above) + Fufther Costs to be incurred = L7,09 + 3,05 20,14
Estimated Total Profit = Contract Price (less) Estimated Total C.osts = 24,20 -20,L4 4,06
Profit to be transferred to P&L = Least of the followins (a) to (f) 3.10
However, this profit is calculated on the basis of the cumulative Cost incurred till the end of the current year' Hence Profit to
be transferred thib year = 3,10 - 35 Profit already taken last yedr = 2,75.
5.38