Cost Accounting - Contract Costing

 

Cost Accounting

CONTRACT COSTING

Part A: Discussion of basic theories including Tables, Formats and different Formulas

Part B: 16 Illustrations with Solutions

Part A

              Construction site

Introduction

 

Contract Costing or Terminal Costing as it is often termed, is a variant of the job costing system, which is applied in businesses engaged in building or other construction work. The jobs are usually the contracts entered into with the customers. As the number of such contracts handled at a time by a business may not be usually large, Contract Costing is comparatively simpler in operation than job costing system. The basic principles applied in Contract Costing are the same as those used in job costing except that these are modified to suit the particular requirements of the contracts.

 

Contract Costing is a type of costing used in construction activities such as construction of buildings, roads, bridges etc. The person who takes contract for a price is called the Contractor and the person from whom it is taken is called the Contractee. We are mainly concerned with the books of the contractor. To find out profit earned or loss incurred on the contract, the contractor prepares a nominal account in his books called ‘Contract Account’. In this account, all the expenses incurred by the contractor are debited and the income i.e. mainly work certified is credited; the difference represents profit or loss.

 

The items generally debited are materials, wages, establishment expenses & other expenses. Depreciation of assets used in the contract will also be debited, but unlike in other types of accounts it is customary in Contract Accounts to debit the opening balance of the assets and credit the closing balance of the same instead of depreciation, wherever it is convenient to do so. Amounts credited are work-in-progress, which consists of value of work certified and cost of work not certified and any scrap of materials etc.

 

The contracts usually run for a number of years; however it is necessary to find out the profit or loss at the end of every year. The profit earned on a Contract Account is primarily called Accounting Profit or Notional Profit. A portion of the Notional Profit is kept as work-in-progress provision and the other portion is transferred to Profit & Loss Account. The profit to be transferred to Profit & Loss Account out of the Notional Profit is ascertained by taking into consideration the degree of completion of the work, cash received etc.

Click here for "Format of Contract Account" in PDF

Profit to be transferred to Profit and Loss Account

 

If there is any contract which is incomplete at the end of the financial year, profit on such incomplete contract is also considered for the purpose of profit and loss account subject to some restrictions. Usually, only a part of such profit on incomplete contract is transferred to profit and loss account. But if there is a loss on incomplete contract, the whole of the loss is debited to profit and loss account.

 

The guidelines in this regard are as follows:

 

1. If the contract is completed 25% or less no profit is transferred to profit and loss account.

 

2. If the contract is completed above 25% but below 50%, profit to be transferred to profit and loss account is –

Notional profit x (Cash received ÷ Value of work certified) x 1/3

 

3. If the contract is completed 50% or more but less than 90%, profit to be transferred to profit and loss account is –

Notional profit x (Cash received ÷ Value of work certified) x 2/3

 

4. If the contract is almost completed (i.e. 90% or more), profit to be transferred to profit and loss account should be calculated on the basis of estimated total profit in any of the following two ways:

 

 First alternative (if not specifically instructed to follow the second alternative)

Profit to be transferred to profit and loss account = Estimated total profit x (Cash received ÷ Contract price)

 

 Second alternative (to be applied only when there is specific instruction)

Profit to be transferred to profit and loss account = Estimated total profit x (Value of work certified ÷ Contract price)

 

Here, Estimated Total Profit

= Contract price – Estimated total cost of completion of the contract

= Contract price − (Total cost up-to-date + Estimated further cost)

 

  Important Notes:

1.

Percentage completion =

(Value of work certified ÷ Contract price) x 100

 

2. Balance of the Accounting / Notional Profit, after proportionate profit is transferred to P/L A/c, will be transferred to WIP Provision Account.

 

3. If there is a notional loss on incomplete contract, the whole of the loss is transferred to profit and loss account.

 

4. If in any problem estimated further cost to complete the contract is given, profit to be transferred to profit and loss account should be calculated on the basis of estimated total profit only. In such cases percentage completion of the contract has to be ignored. In other words, even if the percentage completion of the contract is less than 90%, if the estimated further cost to complete the contract is given in the problem, profit to be transferred to profit and loss account should be calculated on the basis of estimated total profit.

 

5. When the completion of contract is 90% or more, but the estimated further cost to complete the contract is not given in the problem, profit to be taken to profit and loss account should be calculated by using the following formula:

 

Profit to be transferred to profit and loss account =

Notional profit x (Value of work certified ÷ Contract price)

 

Work-in-Progress (WIP)

Work-in-progress can be calculated by using any of the following two formulas:

 

1	WIP =
	Cost of work done + Profit transferred to profit and loss account
2	WIP =
	Value of work certified + Cost of work not certified – WIP Provision

 

                         Construction site

 Part B

Contract Costing

Selected Problems

Illustration: 1

A contractor commenced the work on a particular contract on 1^st April, 2018 and he usually closes his books of accounts on 31^st December of each year. The following information is revealed from his costing records on 31^st December, 2018.

	Rs
Materials sent to site	43,000
Jr. Engineer	12,620
Labour	1,00,220

A machine costing Rs 30,000 remained in use on site for ¹/₅^th of year. Its working life was estimated at 5 years and scrap value at Rs 2,000. A supervisor is paid Rs 2,000 per month and had devoted half of his time on the contract. All other expenses were Rs 14,000 and the materials on site were Rs 2,500.

The contract price was Rs 4, 00,000. On 31^st December, 2018 ²/₃^rd of the contracts were completed. However, the architect gave certificate only for Rs 2, 00,000 on which 80% was paid.

Prepare Contract Account.

 

Solution: 1

                                                              Contract account

Particulars	Rs	Particulars	Rs
To D/Materials sent to site	43,000	By D/Materials at site	2,500
To D/Labour	1,00,220	By Value of work certified	2,00,000
To Dep. on machinery     [(30,000 – 2,000) × 1/5 × 1/5]	1,120	By Cost of work not certified      [W.N. 1]	44,365
To Jr. Engineer	12,620
To Supervisor [2,000 × 9 × ½ ]	9,000
To Other expenses	14,000
To Notional Profit c/d	66,905
	2,46,865		2,46,865
To P/L a/c         [W.N. 3]	35,683	By Notional Profit b/d	66,905
To WIP Provision (b/f)	31,222
	66,905		66,905

 

Working notes:

1.    Computation of cost of work not certified

	Rs
Total cost incurred up to 31.12.2018	1,77,460
Proportion of total contract completed up to 31.12.2018	2/3
∴ Estimated total cost to complete the contract      (1,77,460 × 3/2)	2,66,190
Proportion of total contract certified up to 31.12.2018	½
⇒ Proportion of estimated total cost certified up to 31.12.2018	½
⇒ Cost of work certified         (2,66,190 × ½ )	1,33,095
⇒ Cost of work not certified  (1,77,460 – 1,33,095)	44,365

 

2.    Percentage Completion

= (Value of work certified ÷ Contract Price) × 100%

= (Rs 2, 00,000 ÷ Rs 4, 00,000) × 100%

= 50%

 

3.    Profit to be transferred to P/L A/c

= Notional Profit × (Cash Received ÷ Value of work certified) × ²/₃

= Rs 66,905 × (Rs 1, 60,000 ÷ Rs 2, 00,000) × ²/₃

= Rs 35,683

 

Illustration: 2

The following figures are supplied to you by a contractor for the year ending 31^st December, 2018:

Particulars	Rs
Work-in-Progress on 31-12-2017                                                 Rs 85,000
Less: Cash received from contractee                                           (Rs 55,000)	30,000
During the year:
Wages	8,500
Materials bought	6,000
Working expenses	1,500
Materials issued from stores	10,500
Administrative expenses ( Rs 250 are chargeable to P and L A/c )	1,250
Plant	2,500
Material returned to supplier	450
Material returned to stores	550
Work certified	15,000
Contracts finished       (Work certified and handed over to contractee)	22,500
Profits taken upon contracts	11,500
Advances from contractee	40,000

 

Prepare the Contract Account and the Contractee’s, and show the work-in-progress as it would appear in the Balance sheet.

 

Solution: 2

                                                      Contract account

Particulars	Rs	Particulars	Rs
To Opening WIP	85,000	By Materials returned (450 + 550)	1,000
To D/Materials (6,000 + 10,500)	16,500	By Value of work certified	15,000
To D/Wages	8,500	By Contractee A/c	22,500
To Working expenses	1,500	By Cost of work not certified (b/f)	88,000
To Administrative expenses	1,000
To Plant (Depreciation)	2,500
To P/L A/c	11,500
	1,26,500		1,26,500

 

                                                    Contractee account

Particulars	Rs	Particulars	Rs
To Contract A/c	22,500	By Balance b/d	55,000
To Balance c/d (Balance of cash received as advance)	72,500	By Cash	40,000
	95,000		95,000

 

                             Balance Sheet as at................               (Extract)

Liabilities	Rs	Assets	Rs
		Closing WIP    (W.N.)    1,03,000
		Less: Cash received          72,500           (as advance)	30,500

 

Working notes:

Value of closing work-in-progress

= Value of work certified + Cost of work not certified – WIP Provision

= 15,000 + 88,000 – Nil

= Rs 1, 03,000

 

Illustration: 3

A firm of engineers undertook three contracts beginning on 1^st Jan, 1^st May and 1^st August 2018. Their accounts on 30^th November, 2018 showed the following position:

Particulars	Contract I	Contract II	Contract III
	Rs	Rs	Rs
Contract price	80,000	54,000	60,000
Materials	14,400	11,600	4,000
Wages	22,000	22,500	2,800
General expenses	800	550	200
Cash received for work certified	30,000	24,000	5,400
Work certified	40,000	32,000	7,200
Work uncertified	1,200	1,600	400
Wages outstanding	700	750	350
General expenses outstanding	150	100	50
Plant installed	4,000	3,200	2,400
Materials on hand	800	800	400

 

On the respective dates of the contracts, the plant was installed depreciation thereon being taken at 15% p.a. You are required to prepare the Contract Accounts.

 

Solution: 3

                                                          Contract accounts

Particulars	I	II	III	Particulars	I	II	III
	Rs	Rs	Rs		Rs	Rs	Rs
To D/Materials	14,400	11,600	4,000	By D/Mat. on hand	800	800	400
To D/Wages     (Including o/s)	22,700	23,250	3,150	By Value of work      Certified	40,000	32,000	7,200
To Gen. Expenses     (Including o/s)	950	650	250	By Cost of work      Not certified	1,200	1,600	400
To Dep. on Plant     [W.N. 1]	550	280	120	By P/L A/c (Loss      Transferred)		1,380
To Notional profit	3,400		480
	42,000	35,780	8,000		42,000	35,780	8,000
To P/L A/c [W.N. 3]	1,700			By Notional profit	3,400		480
To WIP Provision	1,700		480
	3,400		480		3,400		480

 

Working notes:

1.    Depreciation on plant

Contract I	Rs 4,000 × 15% × 11/12	Rs 550
Contract II	Rs 3,200 × 15% × 7/12	Rs 280
Contract III	Rs 2,400 × 15% × 4/12	Rs 120

 

2.    Percentage completion

Contract I	(Rs 40,000 ÷ Rs 80,000) × 100%	50%
Contract II	Not required, because incurred loss
Contract III	(Rs 7,200 ÷ Rs 60,000) × 100%	12%

 

3.    Profit to be transferred to P/L A/c

Contract I	3,400 × (30,000 ÷ 40,000) × 2/3	Rs 1,700
Contract II	Entire loss transferred to P/L A/c
Contract III	Percentage completion is less than 25%	Nil

 

Illustration: 4

The following is the Trial Balance of Premier Construction Company, engaged on the execution of contract No.747, for the year ended 31^st December, 2018.

Particulars	Debit (Rs)	Credit (Rs)
Amount received		3,60,000
Buildings	1,60,000
Creditors		72,000
Bank Balance	95,000
Capital Account		5,00,000
Materials	2,00,000
Wages	1,80,000
Expenses	47,000
Plant	2,50,000
	9,32,000	9,32,000

 

The work on Contract No.747 was commenced on 1^st January, 2018. Materials costing Rs 1, 70,000 were sent to the site of the contract but those of Rs 6,000 were destroyed in an accident. Wages of Rs 1, 80,000 were paid during the year. Plant with a cost of Rs 2 lakhs was used from 1^st January to 30^th September and was then returned to the stores. Materials of the cost of Rs 4,000 were at site on 31^st December, 2018.

 

The contract was for Rs 6, 00,000 and the contractee pays 75% of the work certified. Work certified was 80% of the total contract at the end of 2018. Uncertified work was estimated at Rs 15,000 on 31^st December, 2018. Expenses are charged to the contract at 25% of wages. Plant is to be depreciated at 10% for the entire year.

 

You are required to prepare:

1.    Contract Account;

2.    Profit and Loss Account for the year ended 31^st December, 2018; and

3.    Balance Sheet as at 31^st December, 2018.

 

Solution: 4

                                                       Contract 747 Account

Particulars	Rs	Particulars	Rs
To D/Materials sent to site	1,70,000	By D/Materials at site	4,000
To D/Wages	1,80,000	By Abnormal loss of materials	6,000
To Expenses (1, 80,000 × 25%)	45,000	By Value of work certified [W.N. 2]	4,80,000
To Dep. on plant [W.N. 1]	20,000	By Cost of work not certified	15,000
To Notional Profit c/d	90,000
	5,05,000		5,05,000
To P/L A/c [W.N. 4]	45,000	By Notional Profit b/d	90,000
To WIP Provision	45,000
	90,000		90,000

 

                                        P/L A/c for the year ended 31.12.2018

Particulars	Rs	Particulars	Rs
To Abnormal loss of materials	6,000	By Profit from Contract A/c	45,000
To Dep. on plant [W.N. 1]	5,000
To Expenses (47,000 – 45,000)	2,000
To Net Profit (Transferred to B/S)	32,000
	45,000		45,000

 

                                              Balance Sheet as at 31.12.2018

Liabilities	Rs	Rs	Assets	Rs	Rs
Capital:			Buildings		1,60,000
Opening balance	5,00,000		Plant	2,50,000
Add: Net Profit	32,000	5,32,000	Less: Depreciation	25,000	2,25,000
Creditors		72,000	Stock of Materials:
			At Store	30,000
			At Site	4,000	34,000
			WIP      [W.N. 5]	4,50,000
			Less: Cash received	3,60,000	90,000
			Bank A/c		95,000
		6,04,000			6,04,000

 

Working notes:

1.    Depreciation on plant

To be charged to Contract A/c:
For 1.1.2018 to 30.9.2018	2,50,000 × 10% × 9/12	Rs 18,750
For 1.10.2018 to 31.12.2018	50,000 × 10% × 3/12	Rs 1,250	Rs 20,000
To be charged to P/L A/c:	2,00,000 × 10% × 3/12		Rs 5,000
Total depreciation on plant			Rs 25,000

 

2.    Value of work certified

⇒ 80% of Contract Price

⇒ 80% of Rs 6, 00,000

⇒ Rs 4, 80,000

 

3.    Percentage Completion

= (Value of work certified ÷ Contract Price) × 100%

= (Rs 4, 80,000 ÷ Rs 6, 00,000) × 100%

= 80%

 

4.    Profit to be transferred to P/L A/c

= Notional Profit × (Cash Received ÷ Value of work certified) × ²/₃

= Rs 90,000 × (Rs 3, 60,000 ÷ Rs 4, 80,000) × ²/₃

= Rs 45,000

 

5.    Value of closing work-in-progress

     = Value of work certified + Cost of work not certified – WIP Provision

     = 4, 80,000 + 15,000 – 45,000

     = Rs 4, 50,000

 

 

Illustration: 5

The following Trial Balance was extracted on 31^st December, 2018 from the books of Swastik Contractors Limited:

Particulars	Debit (Rs)	Credit (Rs)
Share Capital:
Shares of Rs 10 each		3,51,800
P&L A/c on 1.1. 2018		25,000
Provision for Dep. on Machinery		63,000
Cash received on account Contract - 7		12,80,000
Creditors		81,200
Land and Buildings (Cost)	74,000
Machinery (Cost)	52,000
Bank	45,000
Contract 7:
Materials	6,00,000
Direct Labour	8,30,000
Expenses	40,000
Machinery on site (Cost)	1,60,000
	18,01,000	18,01,000

 

Contract 7 was begun on 1^st January, 2018. The contract price is Rs 24, 00,000 and the customer has so far paid Rs 12, 80,000 being 80% of the work certified. The cost of the work done since certification is estimated at Rs 16,000. On 31^st December, 2018, after the above Trial Balance was extracted machinery costing Rs 32,000 was returned to stores, and materials then on site were valued at Rs 27,000. Provision is to be made for outstanding direct labour amounting to Rs 6,000 and for depreciation of all machinery at 12¹/₂ % on cost.

 

You are required to prepare:

(a) The Contract Account;

(b) The Profit and Loss Account for the year ended 31^st December, 2018; and

(c) The Balance Sheet of Swastik Contractors Limited as at 31^st December, 2018.

 

Solution: 5

                                                       Contract Account

Particulars	Rs	Particulars	Rs
To D/Materials sent to site	6,00,000	By D/Materials at site	27,000
To D/Labour (Incl. o/s 6,000)	8,36,000	By Value of work certified [W.N. 1]	16,00,000
To Expenses	40,000	By Cost of work not certified	16,000
To Dep. on machinery     (1, 60,000 × 12.5%)	20,000
To Notional Profit c/d	1,47,000
	16,43,000		16,43,000
To P/L A/c [W.N. 3]	78,400	By Notional Profit b/d	1,47,000
To WIP Provision	68,600
	1,47,000		1,47,000

 

                                        P/L A/c for the year ended 31.12.2018

Particulars	Rs	Particulars	Rs
To Dep. on machinery     (52,000 × 12.5%)	6,500	By Balance b/d	25,000
To Net Profit (Transferred to B/S)	96,900	By Profit from Contract A/c	78,400
	1,03,400		1,03,400

 

                                              Balance Sheet as at 31.12.2018

Liabilities	Rs	Rs	Assets	Rs	Rs
Share Capital		3,51,800	Land and Buildings		74,000
P/L A/c balance		96,900	Machinery (at cost)	2,12,000
Creditors		81,200	Less: Depreciation	89,500	1,22,500
O/s Direct Labour		6,000	Stock of Materials		27,000
			WIP      [W.N. 4]	15,47,400
			Less: Cash received	12,80,000	2,67,400
			Bank A/c		45,000
		5,35,900			5,35,900

 

Working notes:

1.    Value of work certified

⇒ Cash received ÷ 80%

⇒ Rs 12, 80,000 ÷ 80%

⇒ Rs 16, 00,000

2.    Percentage Completion

= (Value of work certified ÷ Contract Price) × 100%

= (Rs 16, 00,000 ÷ Rs 24, 00,000) × 100%

= 66.67%

 

3.    Profit to be transferred to P/L A/c

= Notional Profit × (Cash Received ÷ Value of work certified) × ²/₃

= Rs 1, 47,000 × (Rs 12, 80,000 ÷ Rs 16, 00,000) × ²/₃

= Rs 78,400

 

4.    Value of closing work-in-progress

     = Value of work certified + Cost of work not certified – WIP Provision

     = 16, 00,000 + 16,000 – 68,600

     = Rs 15, 47,400

 

                                 Construction site

Illustration: 6

The following particulars are obtained from the books of ViCon Limited as on 31^st March, 2018.

Plant and equipment at cost Rs 4, 90,000

Vehicles at cost Rs 2, 00,000

Details of contracts which remain uncompleted as on 31-3-2018 are as follows:    (Rs in lacs)

	Contract nos.
Particulars	V.29	V.24	V.25
Estimated final sales value	8.00	5.60	16.00
Estimated total cost	6.40	7.00	12.00
Actual expenses incurred:
Wages	2.40	2.00	1.20
Materials	1.00	1.10	0.44
Overheads (excluding depreciation)	1.44	1.46	0.58
Total expenses (excluding dep.)	4.84	4.56	2.22
Value certified by architects	7.20	4.20	2.40
Progress payments received	5.00	3.20	2.00

 

Depreciation of plant and Equipment and Vehicle should be charged at 20% to the three contracts in proportion to work certified. You are required to prepare statements showing contract-wise and total –

a)    Profit / loss to be taken to the P & L A/c for the year ended 31^st March, 2018, and

b)    Work-in-progress as would appear in the Balance Sheet as at 31-03-2018.

 

Solution: 6

                             Contract accounts               (Rs in lacs)

Particulars	V.29	V.24	V.25	Particulars	V.29	V.24	V.25
	Rs	Rs	Rs		Rs	Rs	Rs
To D/Materials	1.00	1.10	0.44
To D/Wages	2.40	2.00	1.20	By Value of work      Certified	7.20	4.20	2.40
To Overheads     (Excl. Dep.)	1.44	1.46	0.58
To Depreciation     [W.N. 1]	0.72	0.42	0.24	By P/L A/c (Loss      Transferred)		0.78	0.06
To Notional profit	1.64
	7.20	4.98	2.46		7.20	4.98	2.46
To P/L A/c [W.N. 3]	1.00			By Notional profit	1.64
To WIP Provision	0.64
	1.64				1.64

Working notes:

1.    Amount of depreciation charged to contracts

Depreciation on plant and equipment	4,90,000 × 20%		Rs 98,000
Depreciation on vehicles	2,00,000 × 20%		Rs 40,000
Total depreciation			Rs 1,38,000
Charged to:
Contract V.29	1,38,000 × (7.20 ÷ 13.80)	Rs 72,000	Rs 0.72 lacs
Contract V.24	1,38,000 × (4.20 ÷ 13.80)	Rs 42,000	Rs 0.42 lacs
Contract V.25	1,38,000 × (2.40 ÷ 13.80)	Rs 24,000	Rs 0.24 lacs

 

2.    Profit to be transferred to P/L A/c (only for Contract V.29)

Estimated total profit   = Contract Price – Estimated Total Cost

                               = 8.00 – 6.40 = Rs 1.60 lacs

Profit to be transferred to P/L A/c

= Estimated Total Profit × (Cash Received ÷ Contract Price)

= 1.60 × (5.00 ÷ 8.00) = Rs 1.00 lacs

 

3.    Value of closing work-in-progress          (Rs in lacs)

	V.29	V.24	V.25
Value of work certified	7.20	4.20	2.40
Add: Cost of work not certified	-	-	-
Less: WIP Provision	(0.64)	-	-
Value of closing work-in-progress	6.56	4.20	2.40

 

Illustration: 7

Deluxe Limited undertook a contract for Rs 5, 00,000 on 1.7.2018. On 30.6.2019, when the accounts were closed, the following details about the contract were gathered:

Particulars	Rs
Materials purchased	1,00,000
Wages paid	45,000
General expenses	10,000
Plant purchased	50,000
Materials on hand on 30.6.2011	25,000
Wages accrued on 30.6.2011	5,000
Work certified	2,00,000
Cash received	1,50,000
Work uncertified	15,000
Depreciation of plant	5,000

 

The above contract contained an escalation clause which read as follows:

“In the event of prices of materials and rates of wages increase by more than 5%, the contract price would 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 rates of wages 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.

 

Solution: 7

Contract A/c of Deluxe Limited for the year ended 30.6.2019

Particulars	Rs	Particulars	Rs
To Materials purchased	1,00,000	By Materials on hand	25,000
To Wages paid             Rs 45,000		By Value of work certified	2,00,000
ADD: Accrued           Rs 5,000	50,000
To General expenses	10,000	By Cost of work uncertified	15,000
To Plant depreciation	5,000	By Contract price escalation [W.N. 1]	5,000
To Notional Profit c/d	80,000
	2,45,000		2,45,000
To P/L a/c                  [W.N. 3]	19,512	By Notional Profit b/d	80,000
To WIP provision	60,488
	80,000		80,000

Working notes:

1. Contract price escalation

(As per the Escalation Clause the contract price would be increased because prices of materials and rates of wages increased by 25%, which is more than the minimum required 5% increase in material prices and wage rates for the contract price to be increased.)

 

Particulars	Rs
Increase in material price [(Rs 1,00,000 – Rs 25,000) x (25/125)]	15,000
Increase in wages [(Rs 45,000 + Rs 5,000) x (25/125)]	10,000
Total increase (when material price and wages increased by 25%)	25,000
Total increase (when material price and wages increased by 5%)	5,000
Contract price escalation [25% of (Rs 25,000 – Rs 5,000)]	5,000

 

2. Percentage completion

     (Value of work certified ÷ Contract price) x 100

                   = (2, 05,000 ÷ 5, 05,000) x 100 = 40.60%

 

3. Profit to be transferred to profit and loss account

    Notional profit x (Cash received ÷ Value of work certified) x ¹/₃

                   = 80,000 x (1, 50,000 ÷ 2, 05,000) x ¹/₃

                   = Rs 19,512

Illustration: 8

M/s New Century Builders have entered into a contract to build an office building complex for Rs 480 lakh. The work started on 1^st April, 2018 and it is estimated that the contract will take 15 months to be completed. Work has progressed as per schedule, and the actual costs charged till 31^st March, 2019 are as follows:

Particulars	Rs (in lacs)
Materials	112.20
Labour	162.00
Hire charges for equipments	36.00
Establishment charges	32.40
Total	342.60

 

The following information is available:

Particulars	Rs (in lacs)
Materials in hand as on 31st March, 2019	6.60
Work certified as on 31st March, 2019	400.00
On account payment received till 31st March, 2019	324.00
Work not yet certified as on 31st March, 2019	7.50

 

As per management estimates, the following further expenditure will be incurred to complete the work:

Particulars	Rs (in lacs)
Materials	10.50
Labour	16.00
Sub-contractors	20.00
Hire charges for equipments	3.00
Establishment charges	6.90

 

You are required to compute the value of work-in-progress as on 31^st March, 2019 after considering a reasonable margin of profit and to show the appropriate accounts. Make a provision for contingencies amounting to 5% of the total costs after charging such provision.

 

Solution: 8

                          Contract account      (Rs in lacs)

Particulars	Rs	Particulars	Rs
To Materials	112.20	By Materials in hand	6.60
To Labour	162.00	By Cost of work not certified	7.50
To Hire charges for equipments	36.00	By Value of work certified	400.00
To Establishment charges	32.40
To Notional  profit c/d	71.50
	414.10		414.10
To P/L a/c       [W.N. 2]	40.50	By Notional profit b/d	71.50
To WIP provision	31.00
	71.50		71.50

Working notes:

1. Estimated total profit:            (Rs in lacs)

Particulars	Rs	Rs
Total cost up-to-date:
Materials (112.20 – 6.60)	105.60
Labour	162.00
Hire charges for equipment	36.00
Establishment charges	32.40	336.00
Add: Estimated further cost:
Materials (6.60 + 10.50)	17.10
Labour	16.00
Sub-contractors	20.00
Hire charges for equipment	3.00
Establishment charges	6.90	63.00
Estimated total cost excluding provision		399.00
Add: Provision for contingencies: (399.00 x 5 ÷ 95)		21.00
Estimated total cost including provision		420.00
Contract price		480.00
Estimated total profit		60.00

 

2. Profit to be transferred to profit and loss account:

     Estimated total profit x (Cash received ÷ Contract price)

     = 60.00 x (324.00 ÷ 480.00) = Rs 40.50 Lakh

 

3. Value of work-in-progress (WIP):

     Value of work certified + Cost of work not certified − WIP Provision

     = 400.00 + 7.50 − 31.00 = Rs 376.50 Lakh

 

Illustration: 9

United Construction Company got a contract in January, 2018 for construction of a bridge. The contract price was Rs 5, 00,000. The Company incurred the following expenses up to 31^st December, 2018:

Particulars	Rs
Materials issued	1,10,000
Wages	40,000
Direct expenses	20,000
Plant purchased on 30th June, 2018	1,00,000
Materials in hand	5,000
Cost of uncertified work	2,000

 

Depreciation is to be charged on plant @ 10% per annum. Other works expenses are to be charged    @ 20% of wages and office expenses are to be charged @ 10% of works cost. The value of work certified by the engineer up to 31^st December, 2018 was Rs 3, 00,000 retention money being 20% of the certified value.

 

Prepare a Contract Account showing therein the amount of profit or loss to be transferred to profit and loss account.

 

Solution: 9

                                                      Contract account for the year ended 31.12.2018

Particulars	Rs	Particulars	Rs
To Materials	1,10,000	By Materials in hand	5,000
To Labour	40,000	By Cost of work not certified	2,000
To Direct expenses	20,000	By Value of work certified	3,00,000
To Depreciation on plant     (1,00,000 x 10% x 6/12)	5,000
To Other works expenses     [40,000 x 20%]	8,000
To Office expenses     [{(1,10,000 – 5,000)      +40,000+20,000+5,000      +8,000} x 10%]	17,800
To Notional profit c/d	1,06,200
	3,07,000		3,07,000
To P/L a/c      [W.N. 2]	56,640	By Notional profit b/d	1,06,200
To WIP provision (b/f)	49,560
	1,06,200		1,06,200

 

Working notes:

1. Percentage completion:

     (Value of work certified ÷ Contract price) x 100

     = (3, 00,000 ÷ 5, 00,000) x 100 = 60%

 

2. Profit to be transferred to profit and loss account:

     Notional profit x (Cash received ÷ Value of work certified) x ²/₃

     = 1, 06,200 x (2, 40,000 ÷ 3, 00,000) x ²/₃ = Rs 56,640

 

Illustration: 10

MK Construction Ltd. entered into a contract to construct a building. The contract value is Rs 6, 50,000 to be realised in instalments on the basis of the value of work certified by the architect subject to retention of 10%. The work commenced on 1.4.2018 but it remained incomplete on 31.12.2018 when the final accounts are to be prepared. The facts and figures of the contract are:

 

Particulars	Rs
Plant charged to contract at the commencement	32,000
Materials charged to contract	1,80,000
Wages paid	87,000
Expenses incurred on the contract	38,750

 

Total establishment expenses amounted to Rs 41,000 out of which 25% is attributable to this contract. Out of the materials issued to the contract, materials costing Rs 4,000 were sold for Rs 5,000. A part of the plant (costing Rs 2,000) was damaged on 1.10.2018 and the scrap realised Rs 300 only. Plant, costing Rs 3,000, was transferred to another contract site on 31.12.2018. Plant is to be depreciated @ 10% p.a.

Other information is:

 

Particulars	Rs
Materials in hand on 31.12.2010	17,500
Cash received from the contractee	3,06,000
Cost of work yet to be certified	30,000

 

Prepare a Contract Account showing therein the amount of profit or loss to be transferred to profit and loss account and compute the value of work-in-progress as on 31.12.2018.

 

Solution: 10

Contract account

Particulars	Rs	Particulars	Rs
To Materials	1,80,000	By Sale of materials at site	5,000
To Labour	87,000	By Closing materials at site	17,500
To Direct expenses	38,750	By Profit and loss A/c (abnormal     loss due to plant damaged)     Cost of plant               2,000     (−) Depreciation            100     [2,000 x 10/100 x 6/12]     (−) Scrap realised          300	1,600
To Plant sent to site	32,000	By Sale of scrap of plant	300
To Establishment expenses	10,250	By Plant transferred to other site     Cost of plat                 3,000     (−) Depreciation             225     [3,000 x 10/100 x 9/12]	2,775
To Profit and loss A/c     (profit on sale of     materials)	1,000	By Plant at site     Cost of plat                27,000     (−)Depreciation           2,025     [27,000 x 10/100 x 9/12]	24,975
		By Cost of work not certified	30,000
To Notional Profit c/d	73,150	By Value of work certified     [3,06,000 x 100/90]	3,40,000
	4,22,150		4,22,150
To P/L a/c     [W.N. 2]	43,890	By Notional Profit b/d	73,150
To WIP provision	29,260
	73,150		73,150

 

Working notes:

1. Percentage completion:

     (Value of work certified ÷ Contract price) x 100

     = (3, 40,000 ÷ 6, 50,000) x 100 = 52.3%

2. Profit to be transferred to profit and loss account:

     Notional profit x (Cash received ÷ Value of work certified) x ²/₃

     = 73,150 × (3, 06,000 ÷ 3, 40,000) × ²/₃ = Rs 43,890

3. Value of work-in-progress (WIP):

     Value of work certified + Cost of work not certified − WIP Provision

     = 3, 40,000 + 30,000 − 29,260 = Rs 3, 40,740

 

                                    Construction site

Illustration: 11

Nilcom Construction Company commenced a contract on 1.7.2018. The contract price is Rs 9, 00,000. Actual expenditure till 31.12.2018 and estimated expenditure in 2019 are given below:

Particulars	Actual till 31.12.18   (Rs)	Estimated for 2019  (Rs)
Purchase of materials	1,50,000	2,60,000
Labour	1,10,000	1,20,000
Purchase of plant (original cost)	80,000	−
Miscellaneous expenses	40,000	71,000
	As at 31.12.18    (Rs)	As at 30.9.19    (Rs)
Return of plant to stores (original cost)	20,000	50,000
Materials at site	10,000	Nil
Work certified	4,00,000	Full
Work uncertified	15,000	Nil
Cash received	3,60,000	Full

 

Depreciation is charged on plant @ 20% p.a. on original cost (calculation to be made on time basis). The contract is likely to be completed by 30.9.2019.

 

You are required to prepare the contract account for the year ended 31.12.2018. It has been decided to estimate the total profit on the contract and to take to the credit of profit and loss account that proportion of estimated profit on realised basis which the work actually certified bears to the total contract.

 

Solution: 11

Contract account of Nilcom Construction Company

For the year ended 31.12.2018

Particulars	Rs	Particulars	Rs
To Materials purchased	1,50,000	By Materials at site	10,000
To Labour	1,10,000	By Plant at site     (depreciated value)	54,000
To Plant purchased	80,000	By Plant returned to store     (depreciated value)	18,000
To Miscellaneous expenses	40,000	By Cost of work uncertified	15,000
To Notional profit c/d	1,17,000	By Value of work certified	4,00,000
	4,97,000		4,97,000
To P/L A/c             [W.N. 6]	52,800	By Notional profit b/d	1,17,000
To WIP provision	64,200
	1,17,000		1,17,000

Working notes:

Sl. No.	Particulars	Rs
1	Plant returned to store on 31.12.2018:
	Original cost	20,000
	LESS: Depreciation for 6 months @ 20%	2,000
		18,000
2	Plant at site on 31.12.2018:
	Original cost (Rs 80,000 – 20,000)	60,000
	LESS: Depreciation for 6 months @ 20%	6,000
		54,000
3	Plant returned to store on 30.9.2019:
	Original cost	50,000
	LESS: Depreciation for 15 months @ 20%	12,500
		37,500
4	Plant at site on 30.9.2019:
	Original cost (Rs 80,000 − 20,000 − 50,000)	10,000
	LESS: Depreciation for 15 months @ 20%	2,500
		7,500

 

5. Estimated total profit:

Particulars	Rs	Rs
Total cost up-to-date:
Materials (1,50,000 – 10,000)	1,40,000
Labour	1,10,000
Plant (80,000 – 54,000 – 18,000) [Alternative calculation: Rs 80,000 × 20% × 6/12]	8,000
Miscellaneous expenses	40,000	2,98,000
Add: Estimated further cost:
Materials (10,000 + 2,60,000)	2,70,000
Labour	1,20,000
Plant (54,000 – 7,500 – 37,500) [Alternative calculation: Rs 60,000 × 20% × 9/12]	9,000
Miscellaneous expenses	71,000	4,70,000
Estimated total cost		7,68,000
Contract price		9,00,000
Estimated total profit		1,32,000

 

6. Profit to be transferred to profit and loss account:

     Estimated total profit x (Cash received ÷ Contract price)

     = 1, 32,000 x (3, 60,000 ÷ 9, 00,000) = Rs 52,800

 

Illustration: 12

On 1.4.2018 Bill Ltd. commenced work on a contract which was to be completed by 30.6.2019 at an agreed price of Rs 5, 20,000. From the following information you are required to prepare the Contract Account for the year ended 31.12.2018 and show the calculation of the sum to be credited to the profit and loss account for that year.

Bill Ltd.’s financial year ended on 31.12.2018, and on that day expenditure on the contract totalled Rs 2, 63,000 made up as follows:

Particulars	Rs
Plant	30,000
Materials	1,24,000
Wages	95,000
Sundry expenses	5,000
Head Office charges	9,000
Total	2,63,000

 

Cash totalling Rs 1, 95,000 had been received by 31.12.2018 representing 75% of the work certified till that date. Cost of work completed but not certified till that date was Rs 30,000. A sum of Rs 9,000 had been obtained from the sale of some unsuitable materials which had cost of Rs 8,000. On 31.12.2018 stocks of unused materials on site had cost of Rs 10,000 and the plant was valued at Rs 20,000.

To complete the contract by 30.6.2019 it was estimated that −

(a)      The following additional expenditure would be incurred:

 

Particulars	Rs
Wages	64,000
Materials	74,400
Sundry expenses	9,000

 

(b)   Further plant costing Rs 25,000 would be required;

(c)   The residual value of all plant as at 30.6.2019 would be Rs 15,000;

(d)   Head office charges to the contract would be at the same annual rate plus 10%.

 

It was estimated that the contract would be completed on time, but that a contingency provision of Rs 15,000 should be made. From this estimate and the expenditure already incurred, it was decided to estimate the total profit that would be made on the contract and to take to the credit of the profit and loss account for the year ended 31.12.2018, that proportion of the total profit as it relates to the work actually certified to that date.

 

Solution: 12

Contract A/c of Bill Limited for the year ended 31.12.2018

Particulars	Rs	Particulars	Rs
To Plant	30,000	By Materials at site	10,000
To Materials	1,24,000	By Plant at site (depreciated value)	20,000
To Wages	95,000	By Bank (sale of materials)	9,000
To Sundry expenses	5,000	By Cost of work uncertified	30,000
To Profit and loss account     (profit on sale of materials)	1,000	By Value of work certified     [(1,95,000 x (100 ÷ 75)]	2,60,000
To Head office charges	9,000
To Notional Profit	65,000
	3,29,000		3,29,000
To P/L a/c          [W.N. 2]	32,250	By Notional Profit	65,000
To WIP provision	32,750
	65,000		65,000

 

Working notes:

1. Estimated total profit:

Particulars	Rs	Rs
Total costs incurred up to 31.12.2018:
Plant (30,000 – 20,000)	10,000
Materials (1,24,000 – 8,000 – 10,000)	1,06,000
Wages	95,000
Sundry expenses	5,000
Head office charges	9,000	2,25,000
Add: Estimated further cost:
Plant (20,000 + 25,000 – 15,000)	30,000
Materials (10,000 + 74,400)	84,400
Wages	64,000
Sundry expenses	9,000
Head office charges [{(9,000 ÷ 9) x 6} x 1.10]	6,600	1,94,000
		4,19,000
Add: Provision for contingencies:		15,000
Estimated total cost		4,34,000
Contract price		5,20,000
Estimated total profit		86,000

 

2. Profit to be transferred to profit and loss account:

     Estimated total profit x (Cash received ÷ Contract price)

     = 86,000 x (1, 95,000 ÷ 5, 20,000) = Rs 32,250

 

Illustration: 13

Deluxe Limited undertook a contract for Rs 5, 00,000 on 1^st January, 2018. The company furnishes the following details for the year ended 31^st December, 2018:

Particulars	Rs
Materials consumed	1,65,000
Direct expenses	5,000
Wages	30,000
Materials returned to stores	5,000
Materials stolen from site	10,000
Insurance claim admitted	6,000
Other works expenses @ 20% on wages.
Office expenses @ 10% on works cost.
Materials in hand on 31st December, 2018	15,000
Cash received to the extent of 90% of works certified	2,70,000
Cost of works uncertified	11,000

 

Plant sent to site cost Rs 60,000 with a scrap value of Rs 10,000 and a useful life of 5 years. The plant was used in the contract for 146 days.

Prepare contract account showing therein the cost of materials issued to the site and the amount of profit or loss to be transferred to the profit and loss account. Show also the value of work-in-progress separately.

Solution: 13

Contract A/c of Deluxe Ltd. for the year ended 31.12.2018

Particulars	Rs			Particulars	Rs
To Materials issued to site [W.N. 1]	1,95,000			By Materials stolen               10,000
				Less: Ins. Claims admitted      6,000	4,000
To Wages	30,000			By Insurance claim admitted	6,000
To Direct expenses	5,000			By Materials returned to store	5,000
To Depreciation on plant [W.N. 2]	4,000			By Materials in hand at site	15,000
To Other works expenses     [30,000 x 20%]	6,000			By Cost of works uncertified	11,000
To Office expenses [W.N. 3]	21,000			By Value of works certified [W.N. 4]	3,00,000
To Notional profit c/d	80,000
	3,41,000				3,41,000
To P/L A/c             [W.N. 6]		48,000	By Notional profit b/d		80,000
To WIP provision [b/f]		32,000
		80,000			80,000

Working notes:

1.    Materials issued to site:

	Rs
Materials consumed	1,65,000
Add: Materials returned	5,000
Add: Materials stolen	10,000
Add: Materials in hand at site	15,000
	1,95,000

 

2.    Depreciation on plant:

Depreciation per annum	(Rs 60,000 – 10,000) ÷ 5 = Rs 10,000
Depreciation for the accounting period	(Rs 10,000 ÷ 365) × 146 = Rs 4,000

 

3.    Office expenses:

	Rs
Materials consumed	1,65,000
Add: Direct wages	30,000
Add: Direct expenses	5,000
Add: Depreciation on plant	4,000
Add: Other works expenses	6,000
Works cost	2,10,000
∴ Office expenses [10% of works cost]	21,000

 

4.    Value of work certified:

Cash received	Rs 2,70,000
∴ Value of work certified	Rs 2,70,000 × 100/90 = Rs 3,00,000

 

5.    Percentage completion:

     (Value of work certified ÷ Contract price) x 100

     = (3, 00,000 ÷ 5, 00,000) x 100 = 60%

 

6.    Profit to be transferred to profit and loss account:

     Notional profit x (Cash received ÷ Value of work certified) x ²/₃

     = 80,000 x (2, 70,000 ÷ 3, 00,000) x ²/₃ = Rs 48,000

 

Illustration: 14

Modern Construction Company, with a paid up share capital of Rs 50 lakhs undertook a contract for constructing LIG Houses. The contract price was Rs 50 lakhs and the work commenced on 1-1-2018. Cash received on account of contract on 31-12-2018 was Rs 18 lakhs (90% of the work was certified). Work completed but not certified was estimated at Rs 1, 00,000. As on 31-12-2018 material at site was estimated at Rs 30,000 and machinery costing Rs 2, 00,000 was returned to store. Plant and machinery are to be depreciated at 5% on original cost. Wages outstanding on 31-12-2018 was Rs 5,000.

 

The following were the ledger balances (Dr.) as per the Trial Balance as on 31-12-2018:

 

Ledger Accounts	Balances (Rs)
Land and building	15,00,000
Plant and machinery at cost (60% at site)	25,00,000
Lorries and other vehicles	8,00,000
Furniture	50,000
Materials sent to site	14,00,000
Other equipments	10,000
Fuel and power	1,25,000
Site expenses	5,000
Postage and telegram	4,000
Office expenses	8,000
Rent and rates	15,000
Cash at bank	1,33,000
Wages	2,50,000

 

Prepare:

1.  Contract account for the year ended 31-12-2018,

2.  Profit and loss account for the year ended 31-12-2018, and

3.  Balance sheet as at 31-12-2018.

 

Solution: 14

Contract A/c of Modern Construction Company

For the year ended 31.12.2018

Particulars	Rs	Particulars	Rs
To Materials sent to site	14,00,000	By Materials at site	30,000
To Wages (Including o/s wages)	2,55,000	By Value of work certified [W.N.2]	20,00,000
To Site expenses	5,000	By Cost of work not certified	1,00,000
To Dep. on P/M [WN: 1]	85,000
To Fuel and power	1,25,000
To Notional profit c/d	2,60,000
	21,30,000		21,30,000
To P/L a/c       [W.N. 4]	78,000	By Notional profit b/d	2,60,000
To WIP provision (bal. figure)	1,82,000
	2,60,000		2,60,000

 

Profit and loss account for the year ended 31.12.2018

Particulars	Rs	Particulars	Rs
To Postage and telegram	4,000	By Contract A/c (proportion of     Notional Profit)	78,000
To Office expenses	8,000
To Dep. on P/M [WN: 1]	40,000
To Rent and rates	15,000
To Net profit (transferred      to balance sheet)	11,000
	78,000		78,000

 

Balance sheet as on 31.12.2018

Liabilities	Rs	Assets	Rs
Share capital	50,00,000	P/M at cost                    25,00,000
Net profit	11,000	Less: Depreciation          (1,25,000)	23,75,000
Outstanding wages	5,000	Land and building	15,00,000
		Lorries and other vehicles	8,00,000
		Furniture	50,000
		Other equipments	10,000
		Stock of materials	30,000
		Work-in-progress [W.N. 5]  19,18,000
		Less: Cash received          (18,00,000)	1,18,000
		Cash at bank	1,33,000
	50,16,000		50,16,000

 

Working notes:

1.    Depreciation on plant and machinery:

Particulars	Rs
Plant and machinery at site on 31-12-2018 (at cost) [60% of 25,00,000]	15,00,000
ADD: Plant and machinery returned to store from site         on 31-12-2018 (at cost)	2,00,000
Plant and machinery used in the contract during 2018 (at cost)	17,00,000
Depreciation on plant and machinery charged to contract [5% of 17,00,000]                                                                    (A)	85,000
Depreciation on plant and machinery directly charged to P/L A/c [5% of (25,00,000 – 17,00,000)]                                                (B)	40,000
Total depreciation on plant and machinery                               [A + B]	1,25,000

 

2.    Value of work certified:

Cash received	Rs 18,00,000
∴ Value of work certified	Rs 18,00,000 × 100/90 = Rs 20,00,000

 

3.    Percentage completion:

     (Value of work certified ÷ Contract price) x 100%

     = (20, 00,000 ÷ 50, 00,000) x 100% = 40%

 

4.    Profit to be transferred to profit and loss account:

     Notional profit x (Cash received ÷ Value of work certified) x ¹/₃

     = 2, 60,000 x (18, 00,000 ÷ 20, 00,000) x ¹/₃

     = Rs 78,000

 

5.    Work-in-progress:

= Value of work certified + Cost of work not certified – WIP Provision

= 20, 00,000 + 1, 00,000 – 1, 82,000 = Rs 19, 18,000

Illustration: 15

Reliable Construction Limited commenced a contract on 1^st April, 2018. 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 profit and loss account that proportion of estimated profit on cash basis which work completed bore to total contract. Actual expenditure for the period 1^st April, 2018 to 31^st March, 2019 and estimated expenditure for the period 1^st April, 2019 to 30^th September, 2019 are given below:

Particulars	1.4.2018 to 31.3.2019 Actuals (Rs)	1.4.2019 to 30.9.2019 Estimated (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 (on 30.9.2018)	3,00,000 (on 30.9.2019)
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 30^th September, 2019.

 

Required: Prepare the contract account and determine the profit on the contract for the year ending on 31^st March, 2019 on prudent basis, which has to be credited to profit and loss account.

 

Solution: 15

Contract A/c of Reliable Construction Limited for the year ended 31.3.2019

Particulars	Rs	Rs	Particulars	Rs	Rs
To Materials issued		7,76,250	By Plant (Returned):
To Wages	5,17,500		Cost	1,00,000
Add: Outstanding	12,500		Less: Depreciation	(12,500)	87,500
Less: Prepaid	(37,500)	4,92,500	By Materials at site		82,500
To Plant purchased		4,00,000	By Plant at site:
To Expenses	2,25,000		Cost	3,00,000
Add: Outstanding	25,000		Less: Depreciation	(75,000)	2,25,000
Less: Prepaid	(15,000)	2,35,000	By Value of work     Certified		22,50,000
To Notional Profit c/d		7,66,250	By Cost of work     Uncertified		25,000
		26,70,000			26,70,000
To P/L A/c [W.N. 1, 2]		3,89,000	By Notional Profit b/d		7,66,250
To WIP Provision (b/f)		3,77,250
		7,66,250			7,66,250

 

Working notes:

1. Estimated total profit:

Particulars	Rs	Rs
Total costs incurred up to 31.3.2019:
Plant (12,500 + 75,000)	87,500
Materials (7,76,250 – 82,500)	6,93,750
Wages	4,92,500
Expenses	2,35,000	15,08,750
Add: Estimated further cost:
Plant [(3,00,000 – 75,000) × 25% × 6/12]	28,125
Materials (82,500 + 12,99,375 – 42,500)	13,39,375
Wages (6,18,750 + 37,500 – 12,500 + 5,750)	6,49,500
Expenses (3,75,000 + 15,000 – 25,000 + 10,000)	3,75,000	23,92,000
Estimated total cost		39,00,750
Contract price		49,21,875
Estimated total profit		10,21,125

 

2. Profit to be transferred to profit and loss account:

     Estimated total profit x (Cash received ÷ Contract price)

     = 10, 21,125 x (18, 75,000 ÷ 49, 21,875) = Rs 3, 89,000

Click here for Illustration: 16 and

Solution in PDF