No.

1 for CA/CWA & MEC/CEC MASTER MINDS

12 (A). CONTRACT COSTING

MODEL WISE ANALYSIS OF PAST EXAM PAPERS OF IPCC

M-11 M-13

N - 14
M-12

M-14

M-15

M-16

M-17
N-10

N-12

N-15

N-16

N-17
No. MODEL NAME TO TO
N-11 N-13

1. PREPARATION OF CONTRACT ACCOUNT - 8 - - 8 - - - - - -

8 8
2. PROFIT / LOSS ON INCOMPLETE CONTRACTS - - 4 - - - - - - - 5
3. CALCULATION OF ESTIMATED PROFIT - - - - - - - - 8 - - - -
4. CONTRACTS WITH ESCALATION CLAUSE - - - - - - - - - - - - -

A contract takes longer period to complete and the result of the contract can be known only after
the completion of the contract. If the profit on such contracts is calculated only after their
completion, then wide fluctuations may be noted in the profit figures of contractors from year to
year. The profit in respect of each contract in progress is transferred to the costing profit and loss
account of the year by calculating the notional profit. The portion of notional profit to be transferred
to the costing profit and loss account depends on the stage of completion of a contract.
Contract costing is a form of specific order costing where job undertaken is relatively large and
normally takes period longer than a year to be getting completed. Contract costing is usually
adopted by the contractors engaged in the task of executing Civil Contracts. Contract costing
have the following distinct features:
1. The major part of the work in connection with each contract is ordinarily carried out at the
site of the contract.
2. The bulk of the expenses incurred by the contractor are considered as direct.
3. The indirect expenses mostly consist of office expenses of the yards, stores and works.
4. A separate account is usually maintained for each contract.
5. The number of contracts undertaken by a contractor at a time is usually few.
6. The cost unit in contract costing is the contract itself.
Profit or Loss on Incomplete Contracts:
1. If % of completion of contract is < 25% - NIL
Cash received
2. If % of completion of contract is  25% to  50%  1 3 x Notional Pr ofit x
Work certified
Cash received
3. If % of completion of contract is  50% to  90%  2 3 x Notional Pr ofit x
Work certified
4. If % of completion of contract is ≥ 90% and above – based on estimated profit
Work certified
% of completion of contract  x 100
Contract Pr ice
Based on Estimated Profit: If contract is completed 90% & above then

Work Certified
1) Estimated Pr ofit x
Contract Pr ice

Work Certified Cash Re ceived

2) *** Estimated Pr ofit x x
Contract Pr ice Work Certified

Cost to date Copyrights Reserved

3) Estimated Pr ofit x To MASTER MINDS, Guntur
Total cos t of contract

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Cost to date Cash Re ceived

4) Estimated Pr ofit x x
Total cos t of contract Work Certified

5) (this formula may be preferably used in the absence of estimated profit

Work Certified
figure) Notional Pr ofit x
Contract Pr ice
*** It is preferably to use formula (2) in the absence of specific instructions.
Estimated Profit = Contract Price – Total cost of contract
Total cost of contract = Cost to date + Further cost to be incurred to complete the contract
Notional profit = Work Certified + Work Uncertified – Total cost of contract
Notional Profit = Work Certified – Cost of Work Certified
Cost work Certified = Cost incurred up-to-date – Work uncertified
Work Certified = Notional Profit + Cost of work Certified.
Journal Entry for escalation clause
Contractee a/c Dr xxx
To Contract a/c xxx
The rules in respect of Profits and Losses to be recognised on Contracts is
summarised below:

Combination
Situation Treatment
Current Yr Estimated
Notional Profit ETP Profit: Profit Profit should be recognised only if
Percentage of Completion.
Notional Profit Loss Profit: Loss Estimated Total Loss is Fully provided for in
the current year. Profit should not be
recognized
Loss ETP Loss: Profit Current Loss is fully provided for. Profit is not
recognised even though there may be profit
when the contract is finally completed
Loss Loss Loss: Loss Current Loss or Estimated Total Loss,
Whichever is worse, is fully provided for in the
current year.

PROBLEMS FOR CLASSROOM DISCUSSION

MODEL 1: PREPARATION OF CONTRACT ACCOUNT
PROBLEM 1:The following expenses were incurred on a contract:
(Rs.)
Material purchased 6,00,000
Material drawn from stores 1,00,000
Wages 2,25,000
Plant issued 75,000
Chargeable expenses 75,000
Apportioned indirect expenses 25,000
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 No.1 for CA/CWA & MEC/CEC MASTER MINDS
The contract was for Rs. 20,00,000 and it commenced on January 1, 2011. The value of the
work completed and certified upto 30th November, 2011 was Rs. 13, 00,000 of which Rs.
10,40,000 was received in cash, the balance being held back as retention money by the
contractee. The value of work completed subsequent to the architect’s certificate but before
31st December, 2011 was Rs. 60,000. There were also lying on the site materials of the value
of Rs. 40,000. It was estimated that the value of plant as at 31st December, 2011 was Rs.
30,000. (SM)(Ans.: notional profit = 3,30,000; transferred to costing p & l a/c- 1,76,000)
(Solve Problem no 1 of Assignment Problems as rework)
Note:______________________________________________________________________
___________________________________________________________________________

PROBLEM 2: A contractor prepares his accounts for the year ending 31st December each
year. He commenced a contract on 1st April, 2011.
The following information relates to the contract as on 31st December, 2011:
(Rs.)
Material issued 2,51,000
Labour charges 5,65,600
Salary to Foreman 81,300
A machine costing Rs. 2,60,000 has been on the site for 146 days, its working life is estimated
at 7 years and its final scrap value at Rs. 15,000.
A supervisor, who is paid Rs. 8,000 p.m. has devoted one-half of his time to this contract.
All other expenses and administration charges amount to Rs. 1,36,500.
Material in hand at site costs Rs. 35,400 on 31st December, 2011.
The contract price is Rs. 20,00,000. On 31st December, 2011 two-third of the contract was
completed. The architect issued certificates covering 50% of the contract price, and the
contractor had been paid Rs. 7,50,000 on account.
Prepare Contract A/c and show how much profit or loss should be included in financial
accounts to 31st December, 2011.
(SM) (Ans:(notional profit = 2,13,250; amount to be transferred to P&L A/c 1,06,625)
(Solve Problem no 2 of Assignment Problems as rework)
Note:______________________________________________________________________
___________________________________________________________________________

MODEL 2: PROFIT / LOSS ON INCOMPLETE CONTRACTS

PROBLEM 3: A contract expected to be completed in year 4, exhibits the following
information:
Value of Work Cost of work to Cost of work not Cash received
End of Year
Certified (Rs.) date (Rs.) yet certified (Rs.) (Rs.).
1. 0 50,000 50,000 0
2. 3,00,000 2,30,000 10,000 2,75,000
3. 8,00,000 6,60,000 20,000 7,50,000

The contract price is Rs. 10,00,000 and the estimated profit is 20%.You are required to
calculate, how much profit should have been credited to the Profit and Loss A/c by the end of
years 1, 2 and 3. (PM)(Ans.: Profit for 1st year 0; 2nd year 24,444; 3rd year 1,00,000)
Note:______________________________________________________________________
___________________________________________________________________________
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PROBLEM 4: M/s. Bansals Construction Company Ltd. took a contract for Rs. 60,00,000
expected to be completed in three years. The following particulars relating to the contract are
available:
2011 2012 2013
(Rs.) (Rs.) (Rs.)
Materials 6,75,000 10,50,000 9,00,000
Wages 6,20,000 9,00,000 7,50,000
Cartage 30,000 90,000 75,000
Other expenses 30,000 75,000 24,000
Cumulative work certified 13,50,000 45,00,000 60,00,000
Cumulative work uncertified 15,000 75,000 —
Plant costing Rs. 3,00,000 was bought at the commencement of the contract. Depreciation
was to be charged at 25% per annum, on the written down value method. The contractee
pays75% of the value of work certified as and when certified, and makes the final payment on
completion of the contract.
You are required to make a contract account and contractee account as they would appear in
each of the three years. Also show how the work-in-progress and other items should appear in
the balance sheet.
(SM)(Ans:(2011-loss transferred to costing p&l A/c-65,000; 2012-notional profit-10,38,750; 2013- profit
transferred to costing P & L A/c-1,53,187)
(Solve Problem no 3 of Assignment Problems as rework)
Note:______________________________________________________________________
___________________________________________________________________________

PROBLEM 5: (PRINTED SOLUTION AVAILABLE) Z limited obtained a contract no.999 for

Rs.50lacs.the following details are available in respect of this contract for the year ended
march 31, 2014:
Rs.
Materials purchased 1,60,000
Material issued from stores 5,00,000
Wages & salaries paid 7,00,000
Drawings and maps 60,000
Sundry expenses 15,000
Electricity charges 25,000
Plant hair expenses 60,000
Sub-contract cost 20,000
Material returned to stores 30,000
Material returned to suppliers 20,000
The following balance relating to the contract no.999 for the year ended on March 31, 2013
and march 31, 2014 are available:
As on 31st march, 2013 As on 31st March, 2014
Work certified 12,00,000 35,00,000
Work uncertified 20,000 40,000
Material at site 15,000 30,000
Wages outstanding 10,000 20,000
The contractor receives 75% of work certified in cash.
Prepare contract account and Contractee. (N14, 8M)(Ans.: notional profit =8,35,000)
(Solve Problem no 4 of Assignment Problems as rework)
Note:______________________________________________________________________
___________________________________________________________________________
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No.1 for CA/CWA & MEC/CEC MASTER MINDS
PROBLEM 6: (PRINTED SOLUTION AVAILABLE) The following details have been extracted
from the books of DKG Construction LLP, which closes its books on 31st March every year.
Contract 101 Contract 102
Date of commencement 1st April, 2015 1stDecember,2015
Expected date completion 31st September,2016 31stDecember,2016
Amount (Rs.000) Amount (Rs.000)
Contract Price 4,000 1,100
Material issued to construction 1,400 300
site
Material returned to store 160 60
Plant& Machinery sent to 2,000 300
construction site
Inter-Contract material transfer (80) 80
Materials at site on 150 30
31stMarch,2016
Plant hire charges 400 60
Wages paid to workers 600 540
Overhead apportioned 150 36
Other direct expenses 50 8
Value of work certified 3,000 750
Cost of work not certified 320 40
Progress payment received from 2,880 700
contractees
Estimated cost of completion 270 220
Depreciation is charged on plant and machinery @ 15% p.a. using straight line method.
Required:
Prepare contract account for each contract using columnar format, showing Cost of work
certified and Notional profit / loss on each contract
(RTP M17) (Ans: Cost of work certified : 2,190, 909; Notional profit / loss: 810, (159) for contract 101,102
respectively)

Note:______________________________________________________________________
___________________________________________________________________________

PROBLEM 7: (PRINTED SOLUTION AVAILABLE) M/s ABID Constructions undertook a

contract at a price of Rs. 171.00 lacs. The relevant data for the year ended 31st March, 2014
are as under:
(Rs. ’000)
Material issued at site 7700
Direct Wages paid 3300
Site office cost 550
Material return to store 175
Work certified 12650
Work uncertified 225
Progress Payment Received 10120
Prepaid site office cost as on 31-03-2014 50
Direct wages outstanding as on 31-03-2014 100
Material at site as on 31-03-2014 110

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Additional Information:
a) A plant was purchased for the contract at Rs. 8,00,000 on 01-12-2013.
b) Depreciation @ 15% per annum is to be charged.
c) Material which cost Rs.1,30,000 was destroyed by fire.
Prepare:
i) Contract Account for the year ended 31st March, 2014 and computes the profit to be taken
to the Profit & Loss Account.
ii) Account of Contractee.
iii) Profit & Loss Account showing the relevant items.
iv) Balance Sheet showing the relevant items. (PM)(MAY-14,8M)(Ans:(i)880 (ii)10,120 (iii)750)
(Solve Problem no 5 of Assignment Problems as rework)
Note:______________________________________________________________________
___________________________________________________________________________

PROBLEM 8: A contract is estimated to be 80% complete in its first year of construction as

certified. The contractee pays 75% of value of work certified, as and when certified and makes
he final payment on the completion of contract. Following information is available for the first
year:
Particulars Amt (Rs.)
Cost of work – in – progress uncertified 8,000
Profit transferred to costing Profit & Loss A/c at the end of year I on incomplete
contract 6,000
Cost of work to date 88,000
Calculate the value of work – in – Progress certified and amount of contract price.
(PM, M09 – 8M)(Ans.: Work in Progress certified 2,00,000, Contract Price 2,50,000)
Note:______________________________________________________________________
___________________________________________________________________________

MODEL 3: CALCULATION OF ESTIMATED PROFIT

PROBLEM 9: Compute a conservative estimate of profit on a contract (which has been 90%
complete) from the following particulars:
Particulars Rs.
Total Expenditure to date 22,50,000
Estimated further expenditure to complete the contract (including 2,50,000
Contingencies)
Contract Price 32,50,000
Work Certified 27,50,000
Work Uncertified 1,75,000
Cash Received 21,25,000
(SM, PM)(Ans.: Profit – Rs.4,90,385)
(Solve Problem no 6 of Assignment Problems as rework)
Note:______________________________________________________________________
___________________________________________________________________________
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 No.1 for CA/CWA & MEC/CEC MASTER MINDS
PROBLEM 10: (PRINTED SOLUTION AVAILABLE) Compute a conservative estimate of
profit on a contract (which has been 90% complete) from the following particulars. Calculate
the proportion of profit to be taken to Costing Profit & Loss Account under various methods
and give your recommendation.
(Rs.)
Total expenditure to date 4,50,000
Estimated further expenditure to complete the contract (including 25,000
contingencies)
Contract price 6,12,000
Work certified 5,50,800
Work uncertified 34,000
Cash received 4,40,640
(SM) (Ans.: 98,640)
(Solve Problem no 7 of Assignment Problems as rework)
Note:______________________________________________________________________
___________________________________________________________________________

PROBLEM 11: From the following particulars compute a conservative estimate of profit by 4
methods on a contract which has 80 percent complete:
(Rs.)
Total expenditure to date 8,50,000
Estimate further expenditure to complete the contract 1,70,000
Contract Price 15,30,000
Work Certified 10,00,000
Work not certified 85,000
Cash received 8,16,000
(PM) (N12 - 8M) (Ans.: amount to be transferred to P&L A/c- 1,25,333)
Note:______________________________________________________________________
___________________________________________________________________________

PROBLEM 12: (PRINTED SOLUTION AVAILABLE) Paramount Engineers are engaged in

construction and erection of a bridge under a long-term. The cost incurred up to 31st March
was as under: (information in Rs. lakhs)
Fabrication Costs:
Direct Materials Rs.280 lakhs
Direct Labour Rs.100 lakhs
Overheads Rs. 60 lakhs
Total Rs.440 lakhs
Erection Costs Rs.110 lakhs
Total Costs to date Rs.550 lakhs

The contract price is Rs.11 corers and the received on account till 31st March was Rs.6 Crores.
A technical estimate of the contract indicates the following degree of completion of work:
Fabrication: Direct Material - 70%, Direct Labour and Overheads 60%. Erection - 40%. You
are required to estimate the profit that could be taken to Profit and Loss Account against this
partly completed contract as at 31st March.
(PM)(Ans.: Alternative-I-Rs. 86.36 lakhs; Alternative-II-92.48lakhs)
Note:______________________________________________________________________
___________________________________________________________________________
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PROBLEM 13: (PRINTED SOLUTION AVAILABLE) RST Construction Ltd. commenced a

contract on April 1, 2011. The total contract was for Rs. 49,21,875. It was decided to estimate
the total profit on the contract and to take to the credit of Costing Profit and Loss A/c that
proportion of estimated profit on cash basis, which work completed bore to total contract.
Actual expenditure for the period April 1, 2011 to March 31, 2012 and estimated expenditure
for April 1, 2012 to September 30, 2012 are given below:
April 1, 2011 to April 1, 2012 to
March 31, 2012 Sept. 30, 2012
(Actual) (Estimated)
(Rs.) (Rs.)
Materials issued 7,76,250 12,99,375
Labour : Paid 5,17,500 6,18,750
Prepaid 37,500 -
Outstanding 12,500 5,750
Plant purchased 4,00,000 -
Expenses: Paid 2,25,000 3,75,000
Outstanding 25,000 10,000
Prepaid 15,000 -
Plant returns to store (historical cost) 1,00,000 3,00,000
(on September 30, (on September
2011) 30, 2012)
Work certified 22,50,000 Full
Work uncertified 25,000 -
Cash received 18,75,000 -
Materials at site 82,500 42,500
The plant is subject to annual depreciation @ 25% on written down value method. The
contract is likely to be completed on September 30, 2012.
Required:
Prepare the Contract A/c. Determine the profit on the contract for the year 2011-12 on prudent
basis, which has to be credited to Costing Profit and Loss A/c.
(SM)(Ans.: amount to be transferred to p&l A/c – 3,89,000)
(Solve Problem no 8, 9, 10 of Assignment Problems as rework)
Note:______________________________________________________________________
___________________________________________________________________________
PROBLEM 14: AKP Builders Ltd. commenced a contract on April 1, 2012. The total contract
was for Rs. 5,00,000. Actual expenditure for the period April 1, 2012 to March 31, 2013 and
estimated expenditure for April 1, 2013 to December 31, 2013 are given below:
Particulars 2012-13 2013-14
(actual) (9 months)
(estimated)
Materials issued 90,000 85,750
Labour : Paid 75,000 87,325
Outstanding at the end 6,250 8,300
Plant 25,000 -
Sundry expenses : Paid 7,250 6,875

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 No.1 for CA/CWA & MEC/CEC MASTER MINDS
Prepaid at the end 625 -
Establishment charges 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 plant was scrapped and disposed of for Rs. 2,875. The value of plant at site on 31
March, 2013 was Rs. 7,750 and the value of material at site was Rs. 4,250. Cash received on
account to date was Rs. 1,75,000, representing 80% of the work certified. The cost of work
uncertified was valued at Rs. 27,375.
The contractor estimated further expenditure that would be incurred in completion of the
contract:
i) The contract would be completed by 31st December, 2013.
ii) 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.
iii) Establishment charges would cost the same amount per month as in the previous year.
iv) Rs. 10,800 would be sufficient to provide for contingencies.
Required:
Prepare Contract Account and calculate estimated total profit on this contract. Profit
transferrable to Costing Profit and Loss Account is to be calculated by reducing estimated
profit in proportion of work certified and contract price.
(SM)(Ans.: Amount to be transferred to p&l A/c – 29,960)
(Solve Problem no 11, 12 of Assignment Problems as rework)
Note:______________________________________________________________________
___________________________________________________________________________

PROBLEM 15: (PRINTED SOLUTION AVAILABLE) A construction company under-taking a

number of contracts, furnished the following data relating to its uncompleted contracts as on
31st March, 2012:
Depreciation @ 20% per annum is to be charged on plant issued. While the Contract No. 723 was
carried over from last year, the remaining contracts were started in the 1st week of April, 2011.
(Rs. in lacs)
Contract Numbers
723 726 729 731
Total Contract Price 23.20 14.40 10.08 28.80
Estimated Costs on completion of contract 20.50 11.52 12.60 21.60
Expenses for the year ended 31.3.12 :
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 1.4.11 1.50 — — —
Plant issued at Cost 5.00 3.50 2.75 3.00
Materials at Site on 1.4.11 0.75 — — —
Materials at Site on 31.3.12 0.45 0.20 0.08 0.05
Work Certified till 31.3.11 4.65 — — —
Work Certified during the year 2011-12 12.76 13.26 7.56 4.32
Work Uncertified as on 31.3.12 0.84 0.24 0.14 0.18
Progress payments received during the year 9.57 9.0 5.75 3.60
IPCC_38e_Costing (Problems)_Contract Costing ___________________12A.9
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Required:
i) Determine the profit/loss in respect of each contract for the year ended 31st March, 2012.
ii) State the profit/loss to be carried to Profit & Loss A/c for the year ended 31st March, 2012.
(SM)(Ans.:(i) 5.20, 4.28, (1.27), (0.06); (ii)1.91, 1.80, (1.27), (0.06))
(Solve Problem no 13 of Assignment Problems as rework)
Note:______________________________________________________________________
___________________________________________________________________________

PROBLEM 16: (PRINTED SOLUTION AVAILABLE) A construction company undertook a

contract at an estimated price of Rs.108 lacs, which includes a budgeted profit of Rs. 18 lacs.
The relevant data for the year ended 31.03.2002 are as under:
Particulars (Rs. '000)
Materials issued to site 5,000
Direct wages paid 3,800
Plant hired 700
Site office costs 270
Materials returned from site 100
Direct expenses 500
Work certified 10,000
Progress payment received 7,200
A special plant was purchased specifically for this contract at Rs. 8,00,000 and after use on
this contract till the end of 31.02.2002, it was valued at Rs.5,00,000. This cost of materials at
site at the end of the year was estimated at Rs. 18,00,000. Direct wages accrued as on
31.03.2002 was Rs. 1,10,000.
Required: Prepare the Contract Account for the year ended 31st March, 2002 and compute
the profit to be taken to the Profit and Loss account.
(PM)(Ans.: amount to be transferred to Profit & loss A/c Rs. 1200, % of completion 92.59%)
(Solve Problem no 14 of Assignment Problems as rework)
Note:______________________________________________________________________
___________________________________________________________________________

MODEL 4: CONTRACT WITH ESCALATION CLAUSE

PROBLEM 17: PG Ltd., undertook a contract for Rs. 5,00,000 on 1st April 2013. On 31st
March 2014 when the accounts were closed, the following details about the contract were
gathered:
Rs.
Materials purchased 1,25,000
Wages paid 45,000
General expenses 12,000
Plant purchased 1,25,000
Material in hand 31.3.2014 25,000
Wages accrued 31.3.2014 15,000
Work certified 2,50,000
Cash received 2,00,000
Work uncertified 15,000
Depreciation of plant 12,500

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 No.1 for CA/CWA & MEC/CEC MASTER MINDS
The contract contained an escalation clause, which read as follows:
“In the event of increase(s) of prices of materials and rates of wages by more than 5%, the
contract price would be increased accordingly by 25% of the rise of the cost of materials and
wages beyond 5% in each case.”
It was found that since the date of signing the agreement, the prices of materials and wage
rates increased by 25%. The value of the work certified does not take into account the effect of
the above clause.
Prepare the contract account. The workings should form part of your answer.
(MTP - N14)(Ans.: notional profit = 86,900; amount to be transferred to p & l A/c 46,347)
(Solve Problem no 15 of Assignment Problems as rework)
Note:______________________________________________________________________
___________________________________________________________________________
PROBLEM 18: (PRINTED SOLUTION AVAILABLE) A contractor has entered into a long
term contract at an agreed price of Rs.1,75,000 subject to an escalation clause for materials
and wages as spelt out in the contract and corresponding actual are as follows :
Standard Actual
Materials Qty (tonnes) Rate (Rs.) Qty (tonnes) Rate (Rs.)
A 5,000 5 5,050 4.80
B 3,500 8 3,450 7.90
C 2,500 6 2,600 6.60
Labour Hourly Hourly
Hours Hours
Rate (Rs.) Rate (Rs.)
X 2,000 7.00 2,100 7.20
Y 2,500 7.50 2,450 7.50
Z 3,000 6.50 3,100 6.60
Reckoning the full actual consumption of material and wages the company has claimed a final
price of Rs. 1,77,360. Give your analysis of admissible escalation claim and indicate the final
price payable. (SM)(Ans.: 850,175,850)
(Solve Problem no 16 of Assignment Problems as rework)
Note:______________________________________________________________________
___________________________________________________________________________

ASSIGNMENT PROBLEMS

MODEL 1: PREPARATION OF CONTRACT ACCOUNT

PROBLEM 1: SV Construction Ltd. have obtained a contract for construction of a bridge. The
value of the contract is Rs.12 lacs and the work commenced on 1st October, 1988. The
following details are shown in their books for the year ended 30th September, 1989.

Particulars Amount Particulars Amount

Plant purchases 60,000 Wages accrued as on 30.9.1989 2,800
Wages paid 3,40,000 Materials at site as on 30.9.1989 4,000
Material issued to site 3,36,000 Direct expenses accrued as on 30.9.89 1,200
Direct expenses 8,000 Work not yet certified at cost 14,000
General overheads Cash recd. being 80% of work certified 6,00,000
apportioned 32,000

IPCC_38e_Costing (Problems)_Contract Costing ___________________12A.11

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Life of plant purchased is 5 years and scrap value is nil. Prepare the contract account for the
year ended 30th September, 1989. Show the amount of profit which you consider might be
fairly taken on the contract and how you have calculated it. (Ans.: Profit & Loss a/c 19,200)

PROBLEM 2: A contractor commenced a contract on 1-7-2013. The costing records

concerning the said contract reveal the following information as on 31-3-2014.
Particulars Amount (Rs.)
Material sent to site 7,74,300
Labour paid 10,79,000
Labour outstanding as on 31-3-2014 1,02,500
Salary to Engineer 20,500 per month
Cost of plant sent to site (1-7-2013) 7,71,000
Salary to Supervisor (3/4 time devoted to contract) 9,000 per month
Administration & other expenses 4,60,600
Prepaid Administration expenses 10,000
Material in hand at site as on 31-3-2014 75,800
Plant used for the contract has an estimated life of 7 years with residual value at the end of life
Rs. 50,000. Some of material costing Rs.13,500 was found unsuitable and sold for Rs.10,000.
Contract price was Rs.45,00,000. On 31-3-2014 two third of the contract was completed. The
architect issued certificate covering 50% of the contract price and contractor has been paid
Rs.20,00,000 on account. Depreciation on plant is charged on straight line basis. Prepare
Contract Account. (PM, M12 - 8M) (Ans.: P & L A/c = 1,60,178, WIP (reserve): 1,10,122)

PROBLEM 3: Mr. Bhagwandas undertook a contact for Rs. 15,00,000 on an arrangement that
80% of the value of the work done as certified by the architect of the contract should be paid
immediately and that the remaining 20% be retained until the contract was completed. In
2005-'06-'07 amounts expended were:
Particulars 2005 2006 2007
Materials 1,80,000 2,20,000 1,26,000
Wages 1,70,000 2,30,000 1,70,000
Carriage 6,000 23,000 ---
Cartage 1,000 2,000 6,000
Sundry Exp. 3,000 4,000 3,000
Other information:
2005: Work certified for Rs.3,75,000 & 80% cash received.
2006: 3/4th of contract was certified and 80% of cash received. Uncertified work -20,000.
2007: on 30th June, the work completed.
Shown how the contract account and also contractee's account would appear each of these
years in the books of the contractor assuming that the balance due to him was paid on
completion of the contract.
(Ans.: 2005: P & L A/c – 4000, 2006: P & L A/c – 161067, 2005: P & L A/c – 1,90,933 )

MODEL 2: PROFIT / LOSS ON INCOMPLETE CONTRACTS

PROBLEM 4: A contractor commenced a building contract on October 1, 2010. The contract
price is Rs. 4,40,000. The following data pertaining to the contract for the year 2011-2012 has
been compiled from his books and is as under:

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 No.1 for CA/CWA & MEC/CEC MASTER MINDS
(Rs.)
April 1, 2011 Work-in-progress not certified 55,000
Materials at site 2,000
2011–12 Expenses incurred :
Materials issued 1,12,000
Wages paid 1,08,000
Hire of plant 20,000
Other expenses 34,000
March 31, 2012 Materials at site 4,000
Work-in-progress : Not certified 8,000
Work-in-progress : Certified 4,05,000
The cash received represents 80% of work certified. It has been estimated that further costs to
complete the contract will be Rs. 23,000 including the materials at site as on March 31, 2012.
Required:
Determine the profit on the contract for the year 2011-12 on prudent basis, which has to be
credited to Costing P/L A/c. (SM)(Ans.: amount to be transferred to P&L A/c – 66,273)

PROBLEM 5: Dream house (P) Ltd. is engaged in building two residential housing projects in
the city. Particulars related to two housing projects are as below:
HP-1 (Rs.) HP-2 (Rs.)
Work in Progress on 1st April 2013 7,80,000 2,80,000
Materials Purchased 6,20,000 8,10,000
Land purchased near to the site to open an office - 12,00,000
Brokerage and registration fee paid on the above - 60,000
purchase
Wages paid 85,000 62,000
Wages outstanding as on 31st March, 2014 12,000 8,400
Donation paid to local clubs 5,000 2,500
Plant hire charges paid for three years effecting 72,000 57,000
from 1st April 2013
Value of materials at site as on 31st March, 2014 47,000 52,000
Contract price of the projects 48,00,000 36,00,000
Value of work certified 20,50,000 16,10,000
Work not certified 1,90,000 1,40,000
A concrete mixture machine was bought on 1st April 2013 for Rs. 8,20,000 and used for 180
days in HP-1 and for 100 days in HP-2. Depreciation is provided @ 15% p.a.( this machine
can be used for any other projects)
As per the contract agreement contractee shall retain 20% of work certified as retention money.
Prepare contract account for the two housing projects showing the profit or loss on each
project for the year ended 31st March, 2014.
(PM, RTP - M15)(Ans: amount to be transferred to P&L A/c 1,86,758; 1,56,374)

MODEL 3: CALCULATION OF ESTIMATED PROFIT

PROBLEM 6: Compute a conservative estimate of profit on a contract (which has been 90%
complete) fromthe following particulars. Calculate the proportion of profit to be taken to
Costing Profit & LossAccount under various methods and give your recommendation. (Rs.)
Total expenditure to date 4,50,000
Estimated further expenditure to complete the contract (including contingencies) 25,000
Contract price 6,12,000

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Work certified 5,50,800

Work uncertified 34,000
Cash received 4,40,640
(SM)(Ans.: amount to be transferred to P&L A/c- 98,640)

PROBLEM 7: Hut-to-Palace Ltd. undertook a contract in last year. In the agreement between
the Hut-to-Palace Ltd. and the contractee, there is a clause stating that Hut-to-Palace Ltd. will
receive total cost plus 40% as contract consideration. The following are the details of the
contract as on 31st March, 2014:
(Rs.)
Total expenditure to date 17,64,525
Estimated further expenditure to complete the contract 8,38,645
Value of work certified 21,07,500
Cost of work not certified 3,11,075
Progress payment received from the contractee 14,75,250
From the above information calculate the
a) Conservative estimate of profit for the management of Hut-to-Palace Ltd.
b) What would be the estimated profit from the contract if management of Hut-to- Palace Ltd
has come to know that the contractee has liquidity crunch and it is not able to pay further
payments. (RTP - M14) (Ans.: a) 3,05,223, b) (2,89,275))

PROBLEM 8: PQR Construction Ltd. commenced a contract on April 1, 2009. The total
contract was for Rs.27,12,500. It was decided to estimate the total profit and to take to the
credit of P/L A/c the proportion of estimated profit on cash basis which work completed bear to
the total contract. Actual expenditure in 2009-10 and estimated expenditure in 2010-11 are
given below:
2009 – 10 2010 – 11
Particulars
Actual (Rs.) Estimated (Rs.)
Material issued 4,56,000 8,14,000
Labour : Paid 3,05,000 3,80,000
: Outstanding at end 24,000 37,500
Plant purchased 2,25,000 -
Expenses : Paid 1,00,000 1,75,000
: Outstanding at the end - 25,000
: Prepaid at the end 22,500 -
Plant returned to stores (a historical stores) 75,000 1,50,000 (on Dec
31 2010)
Material at site 30,000 75,000
Work-in-Progress certified 12,75,000 Full
Work-in-progress uncertified 40,000 -----
Cash received 10,00,000 Full
The plant is subject to annual depreciation @ 20% of WDV cost. The contract is likely to be
completed on December 31, 2010.
Required:
i) Prepare the Contract A/c for the year 2009-10.
ii) Estimate the profit on the contract for the year 2009-10 on prudent basis which has to be
credited to P/L A/c (PM, N10 – 8M)(Ans.:(i)notional profit-4,37,500(ii)1,59,263)
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PROBLEM 9: MNP Construction Ltd. commenced a contract on April 1, 2010. The total
contract was for Rs. 17,50,000. It was decided to estimate the total profit and to take to the
credit of Costing P/L A/c the proportion of estimated profit on cash basis which work
completed bore to the total contract. Actual expenditure in 2010-11 and estimated expenditure
in 2011-2012 are given below:
Particulars 2010-11 2012-13
(actual) (Rs.) (estimated) (Rs.)
Materials issued 3,00,000 5,50,000
Labour : Paid 2,00,000 2,50,000
Outstanding at end 20,000 30,000
Plant purchased 1,50,000 —
Expenses : Paid 75,000 1,50,000
: Prepaid at end 15,000 —
Plant returns to store (historical cost) 50,000 1,00,000
(on Dec. 31, 2011)
Material at site 20,000 50,000
Work certified 8,00,000 Full
Work uncertified 25,000 —
Cash received 6,00,000 Full
The plant is subject to annual depreciation @ 25% of WDV Cost. The contract is likely to be
completed on Dec. 31, 2011. Prepare the Contract A/c. Determine the profit on the contract for
the year 2010-2011 on prudent basis, which has to be credited to Costing P/L A/c.
(SM)(Ans.: Amount to be transferred to p & l A/c – 66,322)

PROBLEM 10: A loan Construction Company Ltd. commenced its business of construction on
1-1-2006. The trial balance as on 31-12-2006 showed the following balances:
Particulars Dr. Cr.
Paid-up Share capital 1,00,000
Cash received on a/c of contract
(80% of work certified) 1,20,000
Land and Building 30,000
Machinery at cost (75% at site) 40,000
Bank 4,000
Materials issued to site 40,000
Direct Labour 55,000
Expenses at site 2,000
Lorries and Vehicles 30,000
Furniture 1,000
Office Equipment 10,000
Postage and Telegrams 500
Office Expenses 2,000
Rate and Taxes 3,000
Fuel and Power 2,500
2,20,000 2,20,000
The contract Price is Rs. 3,00,000 and work certified is Rs.1,50,000. the work completed since
certification is estimated at Rs. 1,000(at cost). Machinery costing Rs. 2,000 was returned to
stores at the end of the year. Stock of material at site on 31-12-2006 was of the value of
Rs.5,000. Wages outstanding were Rs. 200. Depreciation on Machinery at 10%. You are
required to calculate the profit from the contract and show how the work-in-progress will appear in
the balance sheet as on 31-12-2006. (M - 14) (Ans.: Profit & Loss a/c 28,427, Reserves 24,873)

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PROBLEM 11: Modern Constructions Ltd obtained a contract No.B-37 for Rs.40 Lakhs. The
following balances and information relates to the contract for the year just ended.
At the beginning At the end of the
Particulars
of the year Rs. year Rs.
Work-in-Progress: Work Certificate 9,40,000 30,00,000
Work Uncertified 11,200 32,000
Materials at site 8,000 20,000
Accrued Wages 5,000 3,000

Particulars Rs. Particulars Rs.

Materials issued from Stores Rs.4,00,000 Indirect Expenses Rs.10,000
Materials directly purchased Rs.1,50,000 Share of General Overheads Rs.18,000
for B-37
Wages paid Rs,6,00,000 Materials returned to Supplier Rs,15,000
Architect’s Fees Rs.51,000 Fines and Penalties paid Rs.12,000
Plant Hire Charges Rs.50,000 Materials returned to Stores Rs.25,000
The Contractee pays 80% of Work Certified in cash. You are required to prepare -
i) Contract Account showing clearly the amount of profits transferred to Profit and Loss
Account,
ii) Contractee’s Account, and
iii) Balance Sheet. (PM)(Ans.: Profit - Rs. 4,56, 427)

PROBLEM 12: PVK Constructions commenced a contract on 1st April, 2014.total contract
value was Rs.100 lakhs. The contract is expected to be completed by 31st December 2016.
Actual expenditure during the period 1st April, 2014 to 31st December 2015 and estimated
expenditure for the period 1st April, 2014 to 31st December 2016 are as follows:
Actual(Rs.) Estimated(Rs.)
1st April, 2014 to 1st April, 2015 to 31st
31st March 2015 December 2016
Material issued 15,30,000 21,00,000
Direct wages paid 10,12,500 12,25,000
Direct wages outstanding 80,000 1,15,000
Plant purchased 7,50,000 -
Expenses paid 3,25,000 5,40,000
Prepaid expenses 68,000 -
Site office expenses 3,00,000 -
Part of the material procured for the contract was un suitable and was sold for
Rs.2,40,000(cost being Rs.2,55,000)and a part of plant was scrapped and disposed of for
Rs.80,000.the value of plant at site on 31st March ,2015 was Rs.2,50,000 and the value of
material at site was Rs.73,000.cash received on account to date was Rs.36,00,000.
Representing 80% of the work certified was valued at Rs.5,40,000
Estimated further expenditure for completion of contract is as follows:
a) An additional amount of Rs.4,62,000 would have to be spent on the plant and the residual
value of the plant on the completion of the contract would be Rs.67,500.
b) Site office expenses would be the same amount per month as charged in the previous year.
c) An amount of Rs.1,57,500 would have to be incurred towards consultancy charges.
REQUIRED:
Prepare Contract Account And Calculate Estimated Total Profit On This Contract.
(N15 - 8M)(Ans.: notional profit – 17,68,500; costing p & L A/c – 4,11,967 and estimated profit – 13,60,000)
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PROBLEM 13: ABC LLP, contractors and civil engineers, are building a new wing to a school.
The quoted fixed price for the contract is Rs. 30,00,000. Work commenced on 1st January
2014 and is expected to be completed on schedule by 30 June 2015.
Data relating to the contract at the year ended 31st March 2015 is as follows.
Amount (Rs.)
Plant sent to site at commencement of contract 2,40,000
Hire of plant and equipment 77,000
Materials sent to site 6,62,000
Materials returned from site 47,000
Direct wages paid 9,60,000
Wage related costs 1,32,000
Direct expenses incurred 34,000
Supervisory staff salaries - Direct 90,000
- Indirect 20,000
Regional office expenses apportioned to contract 50,000
Head office expenses apportioned to contract 30,000
Surveyor’s fees 27,000
Progress payments received from school 18,00,000
Additional information:
1. Plant is to be depreciated at the rate of 25 % per annum following straight line method,
with no residual value.
2. Unused materials on site at 31st March are estimated at Rs. 50,000.
3. Wages owed to direct workers total Rs. 40,000
4. No profit in respect of this contract was included in the year ended 31st March 2014.
5. Budgeted profit on the contract is Rs. 8,00,000
6. While the contract is expected to be completed by the scheduled date without
encountering difficulties, it is obvious to the management that the budgeted profit will not
be realised. However, to calculated the attributable profit to date you are to assume that
further costs to completion will be Rs. 3,00,000.
7. Value of work certified by the surveyor is Rs. 24,00,000.
8. The surveyor has not certified the work costing Rs. 1,80,000
You are required to prepare the account for the school contract for the fifteen months ended
31st March 2015, and calculate the attributable profit to date.
(MTP - N15)(Ans.: Amount to be transferred to p&l A/c – 2,40,000)
PROBLEM 14: Giant Construction Ltd. has been constructing a flyover for 15 months and is
under progress. The following information relating to the work on the contract has been
prepared for the period ended 31st March, 2014.
Amount (Rs.)
Contract price 65,00,000
Value of work certified at the end of the year 57,20,000
Cost of work not yet certified at the end of the year 1,20,000
Opening balances:
Cost of work completed 8,00,000
Materials on site 80,000
Costs incurred during the year:
Material delivered to site 15,90,000
Wages 14,95,000
Hire of plant 2,86,000
Other expenses 2,30,000
Closing balance: Material on site 40,000
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As soon as materials are delivered to the site, they are charged to the contract account. A
record is kept on actual use basis, periodically a stock verification is made and any
discrepancy between book stock and physical stock is transferred to a general contract
material discrepancy account. The stock verification at the yearend revealed a stock shortage
of Rs. 15,000.
In addition to the direct charges listed above, general overheads are charged to contracts at
5% of the value of work certified. General overheads of Rs. 35,000 had been absorbed into
the cost of work completed at the beginning of the year.
It has been estimated that further costs to complete the contract will be Rs. 5,72,000. This
estimate includes the cost of materials on site at the end of the year (31.3.2014) and also a
provision for rectification.
Required:
i) Determine profitability of the above contract and recommend how much profit should be
taken for the year just ended. (Provide a detailed schedule of costs).
ii) State how your recommendation in (i) would be affected if the contract price was Rs. 80,00,000
(rather than Rs. 65,00,000) and if no estimate has been made of costs to completion.
(MTP - N15)(Ans.: i) amount to be transferred to P & L A/c – 8,59,584; ii)amount to be transferred to P & L
A/c – 6,04,267)

PROBLEM 15: Deluxe Limited undertook a contract for Rs. 5,00,000 on 1st July 1986. On
30th June 1987, when the accounts were closed, the following details about the contract were
gathered:
Particulars Amount Particulars Amount
Materials purchased 1,00,000 Wages accrued 30.6.1987 5,000
Waged paid 45,000 Work certified 2,00,000
General Expenses 10,000 Cash received 1,50,000
Plant purchased 50,000 Work Uncertified 15,000
Materials on hand 30.6.87 25,000 Depreciation of Plant 5,000
The above contract contained an escalation clause which reads as following: "In the event of
price of materials and rates of wages increase by more than 5% the contract price will be
increased accordingly by 25% of the rise in the cost of materials and wages beyond 5% in
each case". It was found that since the date of signing the agreement the prices of materials
and wage rates increased by 25%. The value of the work certified does not take into account
the effect of the above clause. Prepare the contract account. Workings should form part of the
answer. (Ans.: Notional Profit 80,000)

MODEL 4: CONTRACT WITH ESCALATION CLAUSE

PROBLEM 16: SB Constructions Limited has entered into a big contract at an agreed price of
Rs.1,50,00,000 subject to an escalation clause for material and labour as spent out on the
contract and corresponding actuals are as follows:
Standard Actual
Material Quantity Rate Per Quantity Rate Per
(Tonnes) Tonne (Rs.) (Tonnes) Tonne (Rs.)
A 3,000 1,000 3,400 1,100
B 2,400 800 2,300 700
C 500 4,000 600 3,900
D 100 30,000 90 31,500
Hourly Rate Hourly Rate
Labour Hours Hours
Rs. Rs.
L1 60,000 15 56,000 18
L2 40,000 30 38,000 35

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 No.1 for CA/CWA & MEC/CEC MASTER MINDS
You are required to:
a) Give your analysis of admissible escalation claim and determine the final contract price
payable.
b) Prepare the contract account, if the all expenses other than material and labour related to
the contract are Rs.13,45,000.
(PM) (Ans.: a) 5,40,000, 1,55,40,000, b) estimated profit - 13,32,000)

ABC ANALYSIS
A category B category C category
Classroom problems 1, 2, 5, 6, 8, 9, 10, 3, 4, 7, 12, 15, 17 -
11, 13, 14, 16, 18
Assignment problems 1, 2, 4, 7, 9, 11, 12, 3, 5, 8, 13, 14 6,10
15, 16

Copyrights Reserved
To MASTER MINDS, Guntur

THE END

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