Advanced AccountingMCQQuestion 5275 of 305
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9. AB Contractors undertakes a fixed price contract of ` 350 Lakhs. Information related to contract is given as under: Material purchased ` 125 lakhs Labour charges ` 95 lakhs Unused material ` 22 lakhs Estimated future costs to be incurred to complete the contract ` 115 Lakhs. Payment received as part payment of contract ` 50 Lakhs. Machinery used for 4 years for the contract. Original cost of the machine is ` 210 Lakhs. Expected life of machinery is 20 years. What will be the Profit/Loss on the contract?

Options

ALoss on contract ` 5 lakhs
BLoss on contract ` 49 Lakhs
CProfit on contract ` 45 Lakhs
DProfit on contract ` 26.5 Lakhs
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Correct Answer

✅ Option A — Loss on contract ` 5 lakhs

All Options:

  • ALoss on contract ` 5 lakhs ✓
  • BLoss on contract ` 49 Lakhs
  • CProfit on contract ` 45 Lakhs
  • DProfit on contract ` 26.5 Lakhs

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Detailed Solution & Explanation

To determine the Profit/Loss on the contract under AS 7:
1. Contract costs incurred to date include:
- Material Consumed: Material purchased (‘ 125\displaystyle `\,125 lakhs) - Unused material (‘ 22\displaystyle `\,22 lakhs) = ‘ 103\displaystyle `\,103 lakhs
- Labour charges: ‘ 95\displaystyle `\,95 lakhs
- Depreciation of machinery: Original cost is ‘ 210\displaystyle `\,210 lakhs with useful life of 20 years. Annual depreciation is ‘ 210/20=‘ 10.5\displaystyle `\,210 / 20 = `\,10.5 lakhs. Since it was used for 4 years, total depreciation = ‘ 10.5×4=‘ 42\displaystyle `\,10.5 \times 4 = `\,42 lakhs.
Cost Incurred to Date=103+95+42=240 lakhs\text{Cost Incurred to Date} = 103 + 95 + 42 = 240 \text{ lakhs}2. Estimated future costs to complete the contract = ‘ 115\displaystyle `\,115 lakhs.
3. Total estimated contract cost is:
Total Estimated Cost=240+115=355 lakhs\text{Total Estimated Cost} = 240 + 115 = 355 \text{ lakhs}4. Total contract price = ‘ 350\displaystyle `\,350 lakhs.
5. Total expected loss on the contract is:
Expected Loss=Total Estimated Cost−Contract Price=355−350=5 lakhs\text{Expected Loss} = \text{Total Estimated Cost} - \text{Contract Price} = 355 - 350 = 5 \text{ lakhs}Under AS 7, the entire expected loss of ‘ 5\displaystyle `\,5 lakhs must be recognized immediately as an expense.
Hence, **Option A** is the correct answer.

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