Question: Date of taking up contract : 1 Dec 2008
Contract Price : 85 lakhs
Cost upto 31-3-2009 : 64.99 lakhs
Estimated further cost of completion : 32.01 Lakhs
On 31-3-09 How much loss is recognized & what is the provosion created?
5 Replies
DIVYA PINCHA
(ASSISTANT MANAGER:MERCHANT BANKING)
(537 Points)
Replied 06 April 2011
Contract Price : 85 lakhs
Cost upto 31-3-2009 : 64.99 lakhs
Estimated further cost of completion : 32.01 Lakhs
Excess cost =64.99+32.01-85=12 Lakhs
Loss of12 lakhs to be regonised n provision for the same has to be created.
OTHER SUGGESTIONS WELCOME
Srinath
(Chartered Accountant)
(166 Points)
Replied 09 April 2011
The answer in my book is given "record loss of 8.04 lakhs ( 12x 64.99/97) & create Provosion for 3.96 lac"
So 12 lakh is clear the other paert is not so clear! I mean we record profits according to % completed but even losses??!
(Guest)
12 lac is the total foreseeable loss, however loss for current year will be .. Revenue recognised ( 67% of 85 lac i.e 56.95 lac) - Cost incurred to date (Rs.64.99) =804000 and expected loss to be recognised immediately will be 396000. OR you can also do as given in your book.
When the outcome of a construction contract can be estimated reliably, contract
revenue and contract costs associated with the construction contract shall be
recognised as revenue and expenses respectively by reference to the stage of
completion of the contract activity at the balance sheet date.
When the outcome of a construction contract cannot be estimated reliably: (a) revenue shall be recognised only to the extent of contract costs incurred that it is
probable will be recoverable; and
(b) contract costs shall be recognised as an expense in the period in which they are
incurred.
When it is probable that total contract costs will exceed total contract revenue, the
expected loss shall be recognised as an expense immediately.
himanshu
(Student)
(64 Points)
Replied 11 April 2011
Issue 1: The loss of Rs. 12 Lacs (64.99+32.01-85) is against estimated cost of Rs. 97 Lacs out of which Rs 64.01 Lacs have been incurred:
So Current Year's loss is proportionate to cost incurred i.e. (64.99/97)*12 = 8.04 Lacs
Issue 2: Provisioning for remaining Rs. 3.96 Lacs as per AS-4, as situation existing at the Balance Sheet date.
Other Reasoning Welcome
Kind regards
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