After reading this chapter, you will be able to understand:
The features of contract costing
The different types of contract costing
Recording of transactions in contract costing
The concept of incomplete contract
Contracts lasting for more than a year
Contract costing applies to jobs undertaken as per the requirements of the clients. Generally, it lasts for more than a year. Contract costing includes activities like building of bridges, roads, dams, ships, buildings, complexes and so on.
Contract costing is a type of job costing and it applies to civil construction works like: building contractors, dams, roads, etc.; civil engineering firms like building repairing firms, landscaping firms, etc.; mechanical engineering firms like ship building, aircraft building, etc.
A contract has the following features:
Contract costing is the method of costing used to find out the cost and profit of each contract for a given period. Contract costing enables the contractor to ascertain and control the cost of each job or contract.
Contract is one form of application of the principles of job costing. It is also called terminal costing. In fact, a bigger job is referred to as a contract. Contract costing is usually adopted by building contractors engaged in the task of executing civil contracts. Contract costing have the following distinct features.
It is an adjusted contract account. This method is considered when it is not possible to determine the contract in advance. It is also used in places and situations where the prices of material and labour are unpredictable. In that case, the contractee agrees to pay the contractor an agreed percentage of profit. This type of contract is mostly followed during the period of emergency when certain types of products are to be manufactured and supplied as in the case of war like situations, natural calamities, defence products, special component parts, etc.
It is a contract entered into when the cost of materials and labour are not stable. Under this contract, the contract price is arrived at by adding up a certain percentage of profit to the cost of work.
Format of a Contract Account
Contract account
NP = Notional profit
EP = Estimated profit
WC = Work certified
WUC = Work uncertified
CP = Contract price
CPL = Costing profit and loss account
CTD = Cost to date
ETC = Estimated total cost
RUP = Reserve for unrealized profit
CPL = Costing profit and loss account
When a contract lasts for more than one year, contract account should be prepared for each year. The following points are to be kept in mind while preparing contract for the subsequent years.
Illustration 1
How much of profit, if any, would you allow to be considered in the following case
Rs | ||
---|---|---|
Contract cost | 1,88,000 | Up-to-date |
Contract value | 3,00,000 | |
Cash received | 1,71,000 | |
Uncertified work | 18,000 | |
Deduction from bills | ||
By way of security | 10% |
Solution:
Problem 1. How much of profit, if any, would you allow to be considered in the following case?
Rs | ||
---|---|---|
Contract cost | 2,88,000 | Up-to-date |
Contract value | 4,00,000 | |
Cash received | 2,71,000 | |
Uncertified work | 28,000 | |
Deduction from bills | ||
By way of security | 10% |
[Ans:]
Illustration 2
The following was the expenditure on a contract for Rs 12,00,000 commenced in January.
Rs | |
---|---|
Materials | 1,80,000 |
Wages | 2,30,000 |
Plant | 26,667 |
Overheads | 15,000 |
Cash received on account of the contract up to 31st December was Rs 3,50,000 being 80% of the work certified. The value of materials in hand was Rs 13,333. The plant had undergone 20% depreciation. Prepare contact account.
Solution:
Contract account
Problem 2. The contract ledger of a company showed the following expenditure on account of contract number 12345 on 31st March 1998.
Rs | |
---|---|
Materials | 1,88,000 |
Plant | 24,000 |
Wages | 2,06,000 |
Establishment charges | 13,400 |
The contract commenced on 1st April 1997 and the contract price is Rs 8,00,000. The value of work certified by the architect is Rs 4,30,000 of which 80% has been received in cash to date. The value of material on hand is Rs 9,000 and the work certified is Rs 8,000.
Assuming depreciation on plant at 10% p.a., prepare the contract account showing the profit the firm would be justified in taking to the credit of profit and loss account of the year.
(Madras, 1999)
[Ans: Notional profit: Rs 37,200; Profit transferred to profit and loss account: Rs 19,840]
Illustration 3
On 1st January, A undertook a contract for Rs 5,00,000. He incurred the following expenses during the year
Rs | |
---|---|
Materials issued from stores | 25,000 |
Material purchased for the contract | 40,000 |
Plant installed at cost | 20,000 |
Wages paid | 50,000 |
Wages occurred due on 31st December | 30,000 |
Direct expenses paid | 5,000 |
Direct expenses accrued due on 31st December | 1,500 |
Establishment | 3,500 |
Of the plant and materials charged to the contract, the plant which cost Rs 1,500 and the materials costing Rs 1,000 were lost. Some of the materials costing Rs 1,500 were sold for Rs 2,000. On 31st December, the plant, which cost Rs 400, was returned to the stores, and a part of the plant, which cost Rs 150, was damaged, rendering itself useless.
The work certified was Rs 2,20,000 and 80% of the same was received in cash. The cost of work done, but uncertified was Rs 10,000. Charge 10% p.a. depreciation on plant and prepare the contract account for the year ended 31st December, by transferring to the profit and loss account the portion of the profit, if any, which you think is reasonable. Show also the particulars relating to the contract in the balance sheet of the contractor as on 31st December.
Solution:
Contract account for the year ended 31st December
Balance sheet as on 31st December
Problem 3. A contractor obtained a contract for Rs 6,00,000 on 1st January 1988. The expenses incurred during the year ended 31st December 1988 were as under.
Rs | |
---|---|
Materials | 1,80,000 |
Wages paid | 1,60,000 |
Wages accrued | 10,000 |
Other expenses | 25,000 |
The plant, specially installed for the contract, worth Rs 45,000 was returned to the stores subject to a depreciation of 20%. Materials at site on 31-12-1988 were valued at Rs 24,000.
The contractor had received Rs 3,60,000 in cash up to 31-12-1988, representing 80% of the work certified. Work uncertified was estimated at Rs 4,000.
Prepare the contract account, showing the profit for the year. Also show how the value of work-in-progress would appear in the balance sheet as on 31st December 1988.
[Ans: Notional profit: Rs 94,000; Profit taken to profit and loss account: Rs 50,133; Profit kept in reserve: Rs 43,867; Work-in-progress in balance sheet: Rs 50,133]
Illustration 4
M/s Anand Associates commenced the work on a particular contract on 1st April 1994. They close their books of accounts for the year on 31st December each year. The following information is available from their costing records on 31st December 1994.
Rs | |
---|---|
Materials sent to site | 40,000 |
Foreman's salary | 12,000 |
Wages paid | 1,20,000 |
A machine costing Rs 40,000 remained in use on site for 1/5th of the year. Its working life was estimated at 5 years and scrap value at Rs 1,500. A supervisor is paid Rs 1,500 per month and he had devoted one-half of his time on the contract.
All other expenses were Rs 8,000. The materials on site were Rs 1,500. The contract price was Rs 3,00,000. On 31st December 1994, 2/3rd of the contract was completed; however, the architect gave a certificate only for Rs 1,80,000 on which 80% was paid. Prepare the contract account.
Contract account for the year ended 31st December 1994
Work uncertified:
Rs 1,86,790 = Rs 1,88,290 – Rs 1,500
Rs 1,86,790 represents the cost of two-thirds of the work
Therefore, full cost of the contract
Therefore, half of full cost
Therefore, the difference of ⅔ and ½ of contract price = Rs 1,86,790 – Rs 1,40,093 = Rs 46,697 (work not certified).
Problem 4. The following balances were extracted from the books of a building contractor on 31st March 1976.
Rs | |
---|---|
Materials issued to site | 62,720 |
Wages paid | 73,455 |
Wages outstanding as on 31-3-1976 | 720 |
Plant issued to site | 6,000 |
Direct charges paid | 2,515 |
Direct charges outstanding on 31-3-1976 | 210 |
Establishment charges | 5,650 |
Stock of materials at site on 31-3-1976 | 1,200 |
Value of work certified on 31-3-1976 | 1,65,000 |
Cost of work not yet certified | 3,500 |
Cash received on account of architect's certificate | 1,41,075 |
The work was commenced on 1st April 1975 and the contract price agreed at Rs 2,45,000. Prepare contract account for the year, providing for depreciation of plant at 25%. Calculate the profit or loss on the contract to date and make such provision in the contract account, as you consider desirable. Set out also the contractor's balance sheet so far as it relates to the contract.
(Madras, 1990)
[Ans: Notional profit: Rs 22,930; Profit credited to profit and loss account: Rs 13,070; Profit kept in reserve: Rs 9,860; Work-in-progress shown in balance sheet: Rs 17,565]
Illustration 5
A company of contractors began to trade on 1st January 1994. During 1994, the company was engaged on only one contract of which the contract price was Rs 5,00,000.
Of the plant and materials charged to contract, plant costing Rs 5,000 and material costing Rs 4,000 were lost in an accident.
On 31st December 1994, plant costing Rs 5,000 was returned to the stores. Cost of work uncertified, but finished Rs 2000 and materials costing Rs 13,000 were in hand on site.
Charge 10% depreciation on plant and compile contract account and balance sheet from the following:
Rs | Rs | |
---|---|---|
Share capital | 1,20,000 | |
Creditors | 10,000 | |
Cash received (80% of work certified) | 2,00,000 | |
Land and buildings | 40,000 | |
Bank balance | 25,000 | |
Charged to contract: | ||
Materials | 90,000 | |
Plant | 25,000 | |
Wages | 1,20,000 | |
Expenses | 7,000 | ______ |
2,78,000 | 3,30,000 |
Solution:
Contract account for the year ended 31st December 1994
Balance Sheet as on 31st December 1994
Problem 5. The following particulars relating to contract ‘A’ are obtained at the year end. Date of commencement is April 1.
Rs | |
---|---|
Contact price | 6,00,000 |
Materials delivered direct to site | 1,20,000 |
Materials issued from store | 40,000 |
Materials returned to store | 4,000 |
Materials at site on December 31 | 22,000 |
Direct labour | 1,40,000 |
Direct expenses | 60,000 |
Architect's fees | 2,000 |
Establishment charges | 25,000 |
Plant installed at cost | 80,000 |
Value of plant on December 31 | 65,000 |
Accrued wages on December 31 | 10,000 |
Accrued expenses on December 31 | 6,000 |
Cost of contract not yet certified | 23,000 |
Value of contract certified | 4,20,000 |
Cash received from contractee | 3,78,000 |
Materials transferred to contract ‘B' | 9,000 |
You are required to show:
(Madras, 1990)
[Ans: Notional profit: Rs 60,000; Profit taken to profit and loss account: Rs 36,000; Profit kept in reserve: Rs 24,000; Contractee's account balance: Rs 3,78,000; Work-in-progress in balance sheet: Rs 41,000]
Illustration 6
The following was the expenditure on a contract for Rs 6,00,000 commenced in January, 1997:
Rs | |
---|---|
Material | 1,20,000 |
Wages | 1,64,400 |
Plant | 20,000 |
Business charges | 9,000 |
Cash received on account to 31st December 1997 amounted to Rs 2,60,000 being 80% of work certified; the value of materials in hand on 31-12-1997 was Rs 25,000. Prepare the contract account for 1997 showing the profit to be credited to the year's profit and loss account. Plant is to be depreciated at 10%.
Solution:
Contract account
Problem 6. The following are the particulars relating to a contract, which was begun on 1st January 1994:
Prepare the contract account for the year 1994 showing the amount of profit that may be taken to the credit of the profit and loss account of the year. Also show the amount of the work-in-progress, as it appears in the balance sheet of the year.
(B.Com., Madurai)
[Ans: Profit: Rs 34,200; WIP: Rs 25,200]
Illustration 7
A company undertook a contract for construction of a large building complex. The construction work commenced on 1st April 1997 and the following data are available for the year ended 31st March 1998.
The contractors own a plant, which originally cost Rs 20,00,000, has been continuously in use in this contract throughout the year. The residual value of the plant after 5 years of life is expected to be Rs 5,00,000. Straight-line method of depreciation is in use.
As on 31st March 1998, the direct wages due and payable amounted to Rs 3,00,000 and the materials at site were estimated at Rs 3,00,000.
Required:
(C.A. Inter)
Solution:
Contract account for the year ended 31st March 1998
Balance sheet (extracts as on 31-03-1998)
Problem 7. The following is the summary of the entries in a contract ledger as on 31st December 1994 in respect of contract no. 51:
Further information is as follows:
Show the contract account and work-in-progress account. Show the same in the balance sheet.
(B.Com., Madurai)
[Ans: Profit: Rs 4,170; WIP: Rs 16,450]
Illustration 8
A firm of building contractors began to trade on 1st April 1997. The following was the expenditure on the contract for Rs 3,00,000:
Materials issued to contract: Rs 50,000; Plant used for contract: Rs 15,000; Wages incurred: Rs 75,000; Other expenses incurred: Rs 2,000.
Cash received on account to 31st March 1998 amounted to Rs 1,28,000 being 80% of the work certified. Of the plant and materials charged to the contract, plant which cost Rs 3,000 and materials which cost Rs 2,500 were lost. On 31st March 1998 plant which cost Rs 2,000 was returned to store, the cost of work done but uncertified was Rs 1,000 and materials costing Rs 2,300 were in hand on site.
Charge 15% depreciation on plant, and take to the profit and loss account 2/3rd of the profit received. Prepare the contract account, contractee's account and balance sheet from the above particulars.
Solution:
Contract account
Contractee's account
Balance sheet (extracts as on 31-03-1998)
Problem 8. A firm of building contractors began to trade on 1st April 1996. The following was the expenditure on the contract for Rs 3,00,000.
Rs | |
---|---|
Materials issued to contract | 51,000 |
Plant used for contract | 15,000 |
Wages incurred | 81,000 |
Other expenses incurred | 5,000 |
Cash received on account to 31st March 1997 amounted to Rs 1,28,000 being 80% of the work certified. Of the plant and materials charged to the contract, plant which cost Rs 3,000 and materials which cost Rs 2,500 were lost. On 31st March 1997 plant which cost Rs 2,000 were returned to stores. The cost of work done but uncertified was Rs 1,000 and materials costing Rs 2,300 were in hand on site.
Charge 15% depreciation on plant, and take to the profit and loss account 2/3rd of the profit received. Prepare a contract account, contractee's account and extracts from balance sheet from the above particulars.
(Madras, 1997)
[Ans: Notional profit: Rs 27,000; Profit taken to profit and loss account: Rs 14,400; Profit kept to reserve: Rs 12,600; Work-in-progress shown in balance sheet: Rs 20,400]
Hint: As instructed, 2/3rd profit is taken to profit and loss account but it is restricted on cash received basis, i.e. 80%.
Illustration 9
Construction Limited is engaged on two contracts A and B during the year. The following particulars are obtained at the year end (December 31):
Contract A | Contract B | |
---|---|---|
April I | September I | |
Date of commencement | Rs | Rs |
Contract price | 6,00,000 | 5,00,000 |
Materials issued | 1,60,000 | 60,000 |
Materials returned | 4,000 | 2,000 |
Materials at site (December 31) | 22,000 | 8,000 |
Direct labour | 1,60,000 | 45,000 |
Direct expenses | 70,000 | 40,000 |
Establishment expenses | 25,000 | 7,000 |
Plant installed at site | 80,000 | 70,000 |
Value of plant (December 31) | 65,000 | 64,000 |
Cost of contract not yet certified | 23,000 | 10,000 |
Value of contract certified | 4,20,000 | 1,35,000 |
Cash received from contractees | 3,78,000 | 1,25,000 |
Architect's fees | 2,000 | 1,000 |
During the period materials amounting to Rs 9,000 have been transferred from contract A to contract B. You are required to show: (a) contract accounts, (b) contractees’ accounts, and (c) extract from balance sheet as on December 31, clearly showing the calculation of work-in-progress.
Solution:
Contract account
Contractee's account
Balance sheet as on 31st December
Problem 9. Two contracts that commenced on 1st January and 1st July 1994, respectively, were undertaken by a contractor and his accounts on 31st December 1994 showed the following position
Contract I | Contract II | |
---|---|---|
Rs | Rs | |
Contract price | 4,00,000 | 2,70,000 |
Expenditure | ||
Materials | 72,000 | 58,000 |
Wages paid | 1,10,000 | 1,12,400 |
General charges | 4,000 | 2,800 |
Plant installed | 20,000 | 16,000 |
Materials on hand | 4,000 | 4,000 |
Wages accrued | 4,000 | 4,000 |
Work certified | 2,00,000 | 1,60,000 |
Work done but not certified (at cost) | 6,000 | 8,000 |
Cash received in respect there of | 1,50,000 | 1,20,000 |
The plants were installed on the date of commencement of each contract; depreciation thereon is to be taken at 10% p.a.
Prepare the contract's account in the tabular form and ascertain the profit or loss to be taken to profit and loss account.
(B.Com., Kerala)
[Ans: A: Profit to be taken to profit and loss account: Rs 9,000; Profit in reserve: Rs 9,000; B: Loss: Rs 6,000]
Illustration 10
The following trial balance was extracted on 31st December 1997 from the books of Swastik Company Limited contractors:
Rs | Rs | |
---|---|---|
Share capital: shares of Rs 10 each | 3,71,800 | |
Profit and loss account on 1st January 1997 | 25,000 | |
Provision for depreciation of 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 | 60,000 | |
Machinery at site (cost) | 1,60,000 | ______ |
18,21,000 | 18,21,000 |
Contract 7 was begun on 1st January 1997. 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 25,000. On 31st December 1997, after the above trial balance was extracted, machinery costing Rs 32,000 was returned to stores, and materials when at site were valued at Rs 30,000.
Provision is to be made for direct labour due Rs 6,000 and for depreciation of all machinery at 12½% on cost.
You are required to prepare: (a) the contract account, (b) a statement of profit, if any, to be properly credited to profit and loss account for 1997, and (c) the balance sheet of Swastik Company Limited as on 31st December.
Solution:
Contract account
Balance sheet (extracts as on 31-12-1997)
Problem 10. The following trial balance was extracted on 31st December 1997 from the books of Swastik Company Limited contractors:
Rs | Rs | |
---|---|---|
Share capital: shares of Rs 10 each | 3,71,800 | |
Profit and loss account on 1st January 1997 | 25,000 | |
Provision for depreciation of 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 | 60,000 | |
Machinery at site (cost) | 1,60,000 | _______ |
18,21,000 | 18,21,000 |
Contract 7 was begun on 1st January, 1997. The contract price is Rs 34,00,000 and the customer has so far paid Rs 13,80,000 being 80% of the work certified.
The cost of the work done since certification is estimated at Rs 25,000.
On 31st December 1997, after the above trial balance was extracted, machinery costing Rs 32,000 was returned to stores, and materials when at site were valued at Rs 30,000.
Provision is to be made for direct labour due Rs 6,000 and for depreciation of all machinery at 12½% on cost.
You are required to prepare: (a) the contract account, (b) a statement of profit, if any, to be properly credited to profit and loss account for 1997, and (c) the balance sheet of Swastik Company Limited as on 31st December.
Illustration 11
(Ascertainment of work uncertified) M/s Kishore & Company commenced the work on a particular contract on 1st April 1997. They close their books of accounts for the year on 31st December each year. The following information is available from their costing records on 31st December 1997:
Rs | |
---|---|
Material sent to site | 70,000 |
Wages paid | 1,50,000 |
Foreman's salary | 20,000 |
A machine costing Rs 32,000 remained in use on site for 1/5th of the year. Its working life was estimated at 5 years and scrap value at Rs 2,000. A supervisor is paid Rs 5,000 per month and had devoted one-half of his time on the contract.
All other expenses were Rs 25,000. The material on site was Rs 9,000. The contract price was Rs 5,00,000. On 31st December 1997, 2/3rd of the contract was completed; however, the architect gave certificate only for Rs 2,50,000 on which 75% was paid. Prepare the contract account.
Solution:
Contract account
Working Notes:
Calculation of work uncertified
Rs | |
---|---|
Amount spent on contract | 2,88,700 |
Less: Material at site | 9,000 |
Net expenditure on contract | 2,79,700 |
Further expenditure to complete the contract, as the contract is 2/3rd completed.
Problem 11. The following particulars relate to a contract undertaken by Ajit Engineers:
Rs | |
---|---|
Materials sent to site | 85,349 |
Labour engaged on site | 74,375 |
Plant installed at site | 15,000 |
Direct expenditure | 3,167 |
Establishment charges | 4,126 |
Materials returned to stores | 549 |
Work certified | 1,95,000 |
Cost of work not certified | 4,500 |
Materials in hand at the end of year | 1,883 |
Wages accrued at the end of year | 2,400 |
Direct expenses accrued at the end of year | 240 |
Value of plant at the end of year | 11,000 |
The contract price agreed | 2,50,000 |
Cash received from contract | 1,80,000 |
You are required to prepare the contract account showing profit, contractee's account and show suitable entries in the balance sheet of the contractor.
(B.Com., Delhi)
[Ans: Profit transferred to profit and loss account: Rs 17,400]
Illustration 12
Deluxe Limited undertook a contract for Rs 5,00,000 on 1st July 1997. On 30th June 1998 when the accounts were closed, the following details about the contract were gathered:
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 raise 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 wages rates increased by 25%. The value of the work does not take into account the effect of the above clause.
Prepare the contract account working should form part of the answer.
(C.A. Inter and I.C.W.A. Inter)
Solution:
Contract account for the year ended 30-06-1998
Working Notes:
Problem 12. From the following data relating to a contract, extract from the books of a company as on 31-3-1994, prepare contract accounts also compute the profit and the value of preparing final accounts.
Rs | |
---|---|
Materials issued for work | 90,000 |
Wages paid to the worker at site | 50,000 |
Plant issued to site | 75,000 |
Salary of supervisory staff at site | 5,500 |
Work certified for payment | 1,76,000 |
Work not certified | 9,000 |
Amount received on work certified | 1,58,400 |
You are further informed that:
[Ans: Notional profit: Rs 36,850; Profit transferred to profit and loss account: Rs 22,110; Reserve: Rs 14,740]
Illustration 13
M/s Kishore & Company commenced work on a particular contract on 1st April 1990. They close their books of accounts for the year on 31st December each year. The following information is available from their closing records on 31-12-1996:
Rs | |
---|---|
Material sent to site | 50,000 |
Foreman's salary | 12,000 |
Wages paid | 1,00,000 |
A machine costing Rs 32,000 remained in use on site for 1/5th of the 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 one half of his time on the contract.
All other expenses were Rs 15,000. The material on site was Rs 10,000. The contract price was Rs 4,50,000. On 31st December, 2/3rd of the contract was completed. However, the architect gave certificate only for Rs 2,20,000 on which 75% was paid.
Prepare the contract account in the company's books.
(Kerala, 1993)
Solution:
M/s Kishore & Company
Contract account for the year ended 31-12-1990
Working Notes:
Computation of work uncertified
Total expenditure on the contract = Rs 1,87,200 – Rs 10,000 = Rs 1,77,200 which is 2/3rd completed
Therefore, total cost for full contract
Work certified Rs 2,25,000 is ½ of contract price of Rs 4,50,000
Net expenditure on contract till date = 1,77,200
Less: Cost of work certified
Cost of work uncertified = Rs 44,300
Problem 13. Kurian Construction Company undertook the construction of a bridge. The value of contract was Rs 75,00,000 subject to retention of 20% until one year after certified completion of the contract and the final approval of contractee's engineer. The following are the details shown in the books on 30th September 1994.
Rs | |
---|---|
Labour on site | 24,30,000 |
Materials direct bought at site | 19,20,000 |
Materials from store | 4,97,200 |
Hire and use of plant—plant upkeep | 72,600 |
Direct expenses | 1,38,000 |
Overheads charged to contract | 2,22,600 |
Materials on hand (30-9-1994) | 37,800 |
Wages accrued (30.9.1994) | 9,600 |
Work not yet certified—cost | 99,000 |
Work certified | 66,00,000 |
Cash received on account | 52,80,000 |
Materials lost in fire accident | 10,000 |
Prepare (a) contract account, (b) contractee's account. Show how the items relating to contract appear in the balance sheet.
(B. Com., Osmania)
[Ans: Profit taken: Rs 7,76,960]
Illustration 14
M/s Arun and Varun undertook a contract for Rs 3,00,000 for constructing a college building. The following is the information concerning the contract during the year 1997:
Rs | |
---|---|
Materials sent to site | 85,349 |
Labour engaged on site | 74,375 |
Plant installed at site at cost | 15,000 |
Direct expenditure | 3,167 |
Establishment charges | 4,126 |
Materials returned to stores | 549 |
Work certified | 2,00,000 |
Value of plant as on 31st December 1997 | 11,000 |
Cost of work not yet certified | 10,000 |
Materials at site 31st December 1997 | 1,883 |
Wages accrued 31st December 1997 | 2,400 |
Direct expenditure accrued 31st December 1997 | 240 |
Cash received from contractee | 1,85,000 |
Prepare contract account, contractee's account and show how the work-in-progress will appear in the balance sheet as on 31st December 1997.
(Madras, 2001)
Solution:
M/s Arun and Varun
Contract account for the year ended 31-12-1997
Contractee's account
Balance sheet (extracts as on 31-12-1997)
Note: When balance sheet ‘extracts’ are shown, there is no need to total both the sides, because they cannot tally. All the assets and liabilities are not available to complete the balance sheet.
Illustration 15
The following particulars are extracted from the books of a building contractor on 31-12-1991.
Materials | Rs |
---|---|
Purchased | 80,000 |
Transfer from other contracts | 2,00,000 |
Issued from central stores | 5,50,000 |
Wages | 8,75,000 |
Indirect expenses | 35,000 |
Inspection fees | 15,000 |
General stores | 40,000 |
Establishment charges | 66,000 |
Scrap (material sold) | 6,000 |
A cement mixing plant was purchased on 1st January 91 for Rs 80,000 and installation charges amounted to Rs 20,000. Of the plant and material charged to the contract, plant which cost Rs 3,000 and material which cost Rs 2,500 were lost. On June 30, plant was transferred to another contract. An additional plant was purchased on October 1, for Rs 2,00,000. Of the materials charged to contract, materials which cost Rs 5,000 were sold for Rs 5,500.
The contract price was Rs 60,00,000. Cash received on account till 31st December 1991 amounted to Rs 25,00,000 being 80% of work certified. The cost of work done but not certified was Rs 1,00,000. The value of material on hand was Rs 20,000. Charge depreciation on plant at 10% p.a. Prepare contract account. Show how work-in-progress account will appear in the balance sheet on 31st December 1991.
(Mangalore, 1992)
Solution:
Contract account for the year ended 31-12-1991
Balance sheet (extracts as on 31-12-1991)
Note: Depreciation on plant transferred to another contract should also be reduced from the plant in the balances sheet for full year. The other contract is to be debited for the depreciation of the later 6 months.
Illustration 16
The expenditure on a contract till 31st March 1998 was Rs 2,00,000 and the work certified was Rs 3,20,000. The contract price is Rs 4,50,000 and the contractee paid Rs 2,80,000 till 31-3-1998. The cost of work done but not certified on that date amounted to Rs 40,000.
It is estimated that the contract will take further 4 months to complete and will necessitate an additional expenditure of Rs 60,000.
You are consulted as to the amount to be credited to profit and loss account on 31-3-1998. State the different amounts of profit that may reasonably be credited to the profit and loss account.
Solution:
Contract account for the period ended 31-3-1998
Since estimated expenditure to complete the contract is given, it is appropriate to ascertain the estimated profit and on that basis, a reasonable amount out of notional profit can be transferred to profit and loss account.
Calculation of estimated profit
Rs | |
---|---|
Total cost of contract till 31-3-98 | 2,00,000 |
Add: Additional expenditure estimated | 60,000 |
Estimated total cost of contract | 2,60,000 |
Contract price | 4,50,000 |
Estimated profit | 1,90,000 |
Different amounts of profit, which may reasonably be credited to profit and loss account, are as follows:
In this case, reserve = Rs 1,60,000 – Rs 1,35,111 = Rs 24,890
Profit in reserve = Rs 1,60,000 – Rs 1,18,222 = Rs 41,778
Profit in reserve = Rs 1,60,000 – Rs 1,46,155 = Rs 13,845
Profit in reserve = Rs 1,60,000 – Rs 1,46,155 = Rs 13,845
Illustration 17
You are required to prepare a contract account for the year ending 31 December 1989 from the following particulars.
Rs | |
---|---|
Materials | 4,00,000 |
Wages | 5,00,000 |
Expenses | 1,00,000 |
Expenses occurred due | 20,000 |
Plant | 2,00,000 |
Work certified (90% received in cash) | 16,50,000 |
Materials at site (31-12-1989) Rs 40,000.
Depreciate plant by 10%. Fifteen per cent of the value of materials issued and 10% of the wages may be taken as incurred for the portion of the work completed, but not yet certified. Expenses are to be charged as a percentage to direct wages. Ignore depreciation on the uncertified portion of work. Ascertain the amount to be transferred to the profit and loss account.
(SK University, 1990)
Solution:
Contract account
Work uncertified is calculated as
Rs | |
---|---|
Materials (15% of 4,00,000) | 60,000 |
Wages (10% of 5,00,000) | 50,000 |
Overheads (24% of 50,000) | 12,000 |
1,22,000 |
Illustration 18
A building contractor furnishes the following records about a contract commenced on 1 April 1985.
Expenses incurred on the contract up to 31st December 1985 were
Rs | |
---|---|
Materials purchased | 21,500 |
Wages paid | 50,110 |
Foreman's salary | 6,310 |
Administrative expenses | 12,610 |
Machinery purchased | 15,000 |
A supervisor with a monthly salary of Rs 1,000 has spent about half of his time on this contract. Materials at site on 31-12-1985 were worth Rs 2,480. The machinery purchased was used for 73 days. The estimated life of the machine is 5 years and its scrap value is estimated at Rs 1,000.
The contract price is fixed at Rs 2,20,000. On 31st December 1985, two-thirds of the contract was completed. Work certified was worth Rs 1,20,000 and Rs 90,000 have been paid on account. Prepare the contract account.
(Gulbarga University, 1988)
Solution:
Contract account
Working Notes:
Work certified (15,000 – 1,000) = Rs 14,000
Work certified = Rs 1,20,000
Work uncertified = Rs 1,47,000 – Rs 1,20,000 = Rs 27,000
Reserve = Rs 30,015 – Rs 15,008 = Rs 21,507
Having gone through this chapter, one would be able understand the meaning, the types of contract accounting. It also gives the students a chance to know about the terms notional profit, cost plus contract, escalation clause and the manner in which notional profits are transferred to profit and loss account.
For the contracts, which are almost complete, any one of the following formula can be used for calculation of profit.
(Estimated profit = Contract price − (Total expenditure + Provision for contingency))
Work-in-progress = Work certified + Work uncertified − (Cash received + Profit reserve), i.e. unrealised profit.
Objective Type Questions
I. State whether the following statements are True or False:
[Ans: 1—false, 2—false, 3—false, 4—false, 5—false, 6—true, 7—true, 8—true, 9—false, 10—false]
II. Choose the correct answer:
[Ans: 1 — (b), 2 — (d), 3 — (c), 4 — (a), 5 — (a), 6 — (d), 7 — (c), 8 — (d), 9 — (b), 10 — (c)]
Short Answer-Type Questions
Essay-Type Questions
Simple Finished Contracts
Rs | |
---|---|
Materials issued | 6,000 |
Materials in hand, at the end | 1,000 |
Wages | 5,000 |
Direct expenses | 20,000 |
Plant purchased | 10,000 |
The contract was completed on 30th June 1998 and the contract price was duly received. Provide depreciation at 20% p.a. on plant and charge indirect expenses at 20% on wages. Prepare contract account in the books of the company.
[Ans: Profit on the contrast: Rs 68,000]
Rs | |
---|---|
Materials bought from the market | 1,500 |
Materials issued from the stores | 500 |
Wages | 2,440 |
Direct expenses | 294 |
Works on cost—25% of direct wages
Office on cost—10% of prime cost
Contract price—Rs 6,000
You are required to prepare a contract account keeping in view that material returned amounted to Rs 240.
(Calicut, 1995)
[Ans: Profit: Rs 447; Office on cost: Rs 449]
RS | ||
---|---|---|
Direct material | 20,250 | |
Direct wages | 15,500 | |
Stores issued | 10,500 | |
Loose tools | 2,400 | |
Tractor expenses: | ||
Running material | 2,300 | |
Wages of drivers | 3,000 | 5,300 |
Other direct charges | 2,650 |
The contract price was Rs 90,000 and the contract took 13 weeks in its completion. The value of loose tools and stores returned at the end of the period were Rs 200 and Rs 3,000, respectively. A plant was also used and returned at a value of Rs 16,000 after charging depreciation at 20%. The value of tractor was Rs 20,000 and depreciation was to be charged to the contract at 15% p.a. The administration and office expenses are to be provided at 10% on works cost.
[Ans: Profit: Rs 26,035; Works cost: Rs 58,150; Depreciation on tractor: Rs 750 and on plant: Rs 4,000]
From the following further particulars, prepare a contract account for the year. Also show the amount of work-in-progress, which will be shown in the balance sheet of the contractor
Rs | |
---|---|
Value of plant on 31st December 1994 | 30,000 |
Stock of materials at the place of work on 31st December 1994 | 5,000 |
Materials returned to stores | 1,000 |
Work certified by the architect | 75,000 |
Cash received | 70,000 |
Cost of work not yet certified | 4,000 |
(B. Com., Kerala)
[Ans: No profit should be taken credit for, as the work certified is less than 1/4th of the contract price’ net expenditure: Rs 89,000]
RS | |
---|---|
Materials directly purchased | 1,80,000 |
Materials issued from stores | 50,000 |
Wages | 2,44,000 |
Direct expenses | 24,000 |
Plant purchased | 1,60,000 |
Proportionate establishment charge | 54,000 |
The contract was for Rs 15,00,000 and up to 31-12-1991 Rs 6,00,000 had been received in cash which represented 80% of work certified.
The materials at site unconsumed were valued at Rs 15,000. The contract plant was to be depreciated by Rs 16,000.
Prepare the contract account showing that profits thereon have been earned to date.
(Madras, 1992)
[Ans: Notional profit: Rs 1,97,000; Profit earned to date: Rs 1,05,067]
Rs | |
---|---|
Materials purchased | 58,063 |
Material from stores | 9,785 |
Plant which had been used on other contracts | 12,523 |
Additional plant purchased | 3,610 |
Wages | 73,634 |
Direct expenses | 2,036 |
Proportion of establishment charge | 8,720 |
The contract which had commenced on 1st January 1994 was for Rs 3,00,000 and the amount certified by the architect, after a deduction of 20% retention money, was Rs 1,20,800, the work being certified up to 30th June 1994.
The materials on the site at the date were valued at Rs 9,858. A contract plant ledger was also kept in which depreciation was dealt with monthly, the amount debited in respect of the plant on the contract up to 30th June 1965 was Rs 1,130.
You are required to prepare an account showing the profit on the contract up to 30th June 1994.
(B. Com., Andhra)
[Ans: Profit: Rs 4,000]
Rs | |
---|---|
Stores issued to contract | 2,00,000 |
Stores on hand on 31-3-1985 | 10,000 |
Wages paid | 1,80,000 |
Plant purchased | 2,00,000 |
Direct expenses | 25,000 |
Overheads allocated to contract | 12,000 |
Work finished but not yet certified | 12,000 |
Plant to be depreciated at 10%. You are required to prepare an account showing profit and loss on contract as on 31-3-1985 and the amount of profit the company would be justified in taking to the credit of profit and loss account for the year.
(Madras, 1985)
[Ans: Notional profit: Rs 1,05,000; Profit to be taken to the credit of profit and loss account: Rs 52,500]
Rs | |
---|---|
Materials directly purchased | 90,000 |
Materials issued from stores | 25,000 |
Plant purchased | 80,000 |
Wages | 1,22,000 |
Direct expenses | 12,000 |
Proportionate establishment charges | 27,000 |
3,56,000 |
The contract was for Rs 7,50,000 and up to 30th June 1994 Rs 2,90,000 had been received in cash which represented 80% of work certified by the architect. The materials on site unconsumed were valued at Rs 7,500. The depreciation on plant worked out to Rs 8,000.
Prepare the contract account showing what profit therein had been carried to date. Also state what amount should, in your opinion, be taken to profit and loss account of the period.
(Madras, 1995)
[Ans: Notional profit: Rs 86,000; Profit to be taken to profit and loss account: Rs 45,867]
Rs | |
---|---|
Materials | 60,000 |
Plant | 10,000 |
Wages | 82,200 |
Establishment charges | 4,300 |
1,56,500 |
The contract was commenced on 1st January and the contract price was Rs 3,00,000; cash received on account to date was Rs 1,20,000 representing 80% of the work certified the remaining 20% being retained until completion. The value of materials on hand was Rs 2,000 and the cost of work finished but not certified as at 31st December was Rs 3,000.
Prepare an account in respect of the contract, showing the price to date, assuming depreciation on plant at 10 per cent annum and state the proportion of profit the company would be justified in taking to the credit of profit and loss account.
(B. Com., Agra)
[Ans: Rs 4,000]
Rs | |
---|---|
Materials issued from stores | 48,925 |
Materials purchased | 2,90,315 |
Wages | 3,68,170 |
Direct expenses | 10,130 |
Establishment charges | 43,600 |
Plant which had been used on other contracts | 62,615 |
Additional plant purchased | 18,050 |
The contract which had commenced on 1-7-1992 was for Rs 15,00,000 and the amount certified by the architect, after deduction of 20% retention money was Rs 6,04,000, the work being certified till 31-12-1992. The materials on site on that date were valued at Rs 49,290. The depreciation on plant in respect of this contract till 31-12-1992 was Rs 5,650.
Prepare a contract account, showing the profit on the contract up to 31-12-1992.
(Madras, 1995)
[Ans: Notional profit: Rs 37,500; Profit on the contract: Rs 20,000]
Rs | |
---|---|
Materials directly purchased | 90,000 |
Materials issued from stores | 25,000 |
Plant purchased | 80,000 |
Wages | 1,22,000 |
Direct expenses | 12,000 |
Portion of establishment charges | 27,000 |
3,56,000 |
The contract was for Rs 7,50,000; and up to 30th June Rs 2,90,000 had been received in cash which represented the full amount certified less 20% retention money. The materials on site unconsumed were valued at Rs 7,500. The contracting plant was to be depreciated by Rs 8,000.
Prepare the contract account showing the profit that had been earned to date. Also state what amount should, in your opinion, be taken to the profit and loss account of the period.
(B. Com., Allahabad)
[Ans: Rs 86,000, Rs 45,866]
Rs | |
---|---|
Materials issued to contract | 76,500 |
Plant issued for contract | 22,500 |
Wages | 1,21,500 |
Other expenses | 7,500 |
Cash received on contract to 31st December 1997 amounted to Rs 3,84,000 being 80% of work certified.
Of the plant and materials charged to the contract, plant which cost Rs 9,000 and materials costing Rs 7,500 were lost.
On 31st December 1997, plant costing Rs 6,000 was returned to stores. The cost of work done but uncertified was Rs 3,000 and materials costing Rs 6,900 were in hand. Charge 15% depreciation on plant. Reserve 1/3rd profits earned and prepare contract account from the above particulars.
[Ans: Notional profit: Rs 2,89,875; Closing plant at state: Rs 6,375; Profit kept in reserve at 1/3: Rs 96,625; Profit taken to profit & loss account: Rs 1,93,250]
Hint: Due to the specific instruction to reserve 1/3rd of the profits, increasing the reserve based on ‘cash received to work certified ratio’ may not be appropriate.
At the end of the year, the machinery was considered to be worth Rs 20,000 and the materials at the site were of the value of Rs 5,000. Work certified during the year totalled Rs 4,00,000. In addition, the work-in-progress, but not certified at the end of the year cost Rs 15,000. Prepare the books of The Kedar. Also show various figures of profit that can be transferred reasonably to profit and loss account.
(B.Com., Delhi)
[Ans: Profit: Rs 15,000]
14. (Valuation of work uncertified)
Contractors Limited undertook a special contract for a total value of Rs 12,00,000. It was expected that the contract would be completed by 31st January 1992. You are required to prepare a contract account for the year ending 31-1-1992 from the following.
Rs | |
---|---|
Wages | 3,00,000 |
Materials sent to site | 1,50,000 |
Materials lying at site on 31-1-1992 | 20,000 |
Special plant | 1,00,000 |
Overheads | 60,000 |
Work certified | 8,00,000 |
Depreciation at 10% to be provided on plant. Cash received is 80% of work certified. Five per cent of the value of materials used and 6% of wages may be taken to have been incurred for the portion of work completed but not yet certified. Overheads are charged as a percentage of direct wages.
[Ans: Notional profit: Rs 3,28,100; Profit transferred to profit and loss account: Rs 1,74,987; Cost of work uncertified: Rs 28,100]
Meenakshi Company Limited undertook a contract for construction of a bridge on 1-1-1997. The contract is expected to be completed by 30-6-1998. The contract price is Rs 8,00,000. You are required to prepare the contract account for the year ending 31-12-1997 from the following data:
Rs | |
---|---|
Materials issued | 2,00,000 |
Wages | 75,000 |
Materials returned to stores | 10,000 |
Plant used for full year | 2,00,000 |
General overheads | 80,000 |
Depreciation of plant 10% supervisors’ salary | 10,000 |
Work certified | 5,00,000 |
Cash received is 80% of work certified. Ten per cent of materials issued and 15% of wages may be taken to have been incurred for the portion of work completed but not yet certified. General overheads are charged as percentage of direct wages.
[Ans: Notional profit: Rs 1,68,250; Profit transferred to profit & loss account: Rs 89,733; Cost of work uncertified: Rs 43,250]
Rs | |
---|---|
Machinery installed at site | 30,000 |
Materials sent to site | 1,70,698 |
Labour at site | 1,48,750 |
Direct expenses | 6,334 |
Overhead charges allocated | 8,252 |
Materials returned from site | 1,098 |
Work certified by architect | 3,90,000 |
Cash received | 3,60,000 |
Cost of work not certified | 9,000 |
Materials on hand as on 31-12-1981 | 3,766 |
Wages accrued due on 31-12-1981 | 5,380 |
Value of machinery as on 31-12-1981 | 22,000 |
It was decided that profit made on the contract in the year should be arrived at by deducting the cost of work certified from the total value of the architect's certificates, that 1/3rd of the profit so arrived as should be regarded as provision against contingencies and that such provision should be increased by taking to the credit of profit and loss account only such portion of the 2/3rd profit as the cash received before the amount is taken to the credit of the profit and loss account. Prepare contract account.
(M.Com., 1989)
[Ans: Notional profit: Rs 56,450; Profit taken to the credit of profit and loss account: Rs 34,738; Total profit kept in reserve: Rs 21,712]
Rs | |
---|---|
Materials issued from stores | 50,000 |
Materials purchased for the contract | 45,000 |
Plant installed at cost | 35,000 |
Wages paid | 1,00,000 |
Wages accrued due on 31st December | 40,000 |
Direct expenses paid | 10,000 |
Direct expenses accrued due on 31st December | 2,500 |
Establishment | 6,500 |
Of the plant and materials charged to the contract, the plant which cost Rs 2,000 and the materials costing Rs 1,500 were lost. Some of the materials costing Rs 2,000 were sold for Rs 2,500. On 31st December the plant, which cost Rs 500, was returned to the stores and on the same date a part of the plant, which cost Rs 200, was damaged rendering itself useless.
The work certified was Rs 2,40,000 and 80% of the same was received in cash. Cost of work done but uncertified was Rs 1,000. Charge 10% p.a. depreciation on plant and prepare the contract account for the year ended 31st December, by transferring to the profit and loss account the portion of the profit, if any, which you think is reasonable. Show also the particulars relating to the contract in the balance sheet of the contractor on 31st December.
(B.Com., Bangalore)
[Ans: Loss on contract: Rs 12,800; Work-in-progress shown in balance sheet: Rs 49,000; Profit and loss account balance on the assets side of balance sheet (12,800 + 3,500 + 180 – 500) = Rs 15,980]
Mr Ram undertook two contracts that commenced on 1st January 1998 and 1st July 1998, respectively. The accounts on 31st December 1998 showed the following position.
Contract I, Rs | Contract II, Rs | |
---|---|---|
Contract price | 4,00,000 | 2,70,000 |
Expenditure: | ||
Materials | 72,000 | 58,000 |
Wages paid | 1,10,000 | 1,12,400 |
General charges | 4,000 | 2,800 |
Plant installed | 20,000 | 16,000 |
Materials on hand | 4,000 | 4,000 |
Wages accrued | 4,000 | 4,000 |
Work certified | 2,00,000 | 1,60,000 |
Cash received in respect thereof | 1,50,000 | 1,20,000 |
Work done but not certified (at cost) | 6,000 | 8,000 |
The plants were installed on the date of commencement of each contract; depreciation thereon is to be taken at 10% p.a.
Prepare the contract accounts in tabular form and ascertain the profit or loss to be taken to profit and loss account.
[Ans: Contract I—Notional profit: Rs 18,000; Profit credited to profit and loss: 9,000; Contract II—Loss, fully transferred to profit and loss: Rs 6,000]
During 1997, Indian Contractors Limited undertook two contracts, the first on 1st July 1997 and the second on 30th September 1997. On 31st December when accounts were made up, their position was as follows:
Contract I, Rs | Contract II, Rs | |
---|---|---|
Contract price | 2,70,000 | 3,00,000 |
Expenditure: | ||
Materials | 58,000 | 20,000 |
Wages | 1,12,400 | 14,000 |
General expenses | 2,800 | 1,000 |
Plant installed | 16,000 | 12,000 |
Materials on hand | 4,000 | 2,000 |
Wages accrued | 3,600 | 1,600 |
General expenses accrued | 400 | 200 |
Work certified | 1,60,000 | 36,000 |
Cash received | 1,20,000 | 27,000 |
Work uncertified | 8,000 | 2,000 |
The plant was installed on the dates of the contracts and depreciation is to be provided at 10% p.a. Prepare contract accounts in columnar from and show the extracts in the balance sheet of the company relating to the two contracts.
(C.A. Adapted)
[Ans: Contract I—Loss fully transferred to profit and loss account: Rs 6,000; Contract II—Notional profit: Rs 2,900, fully kept in reserve; Work-in-progress in balance sheet—Contract I: Rs 48,000; Contract II: Rs 8,100; Total: Rs 56,100]
Construction Limited is engaged on two contracts A and B during the year. The following particulars are obtained at the end of December 199
Contracts | ||
---|---|---|
A April 1 Rs | B September 1Rs | |
Contract price | 6,00,000 | 5,00,000 |
Materials issued | 1,60,000 | 60,000 |
Materials returned | 4,000 | 2,000 |
Materials at site (December 31) | 22,000 | 8,000 |
Direct labour | 1,50,000 | 42,000 |
Direct expenses | 66,000 | 35,000 |
Establishment expenses | 25,000 | 7,000 |
Plant installed at site at cost | 80,000 | 70,000 |
Value of plant (December 31) | 65,000 | 64,000 |
Cost of contract not yet certified | 23,000 | 10,000 |
Cost of contract certified | 4,20,000 | 1,35,000 |
Cash received from contractees | 3,78,000 | 1,25,000 |
Architect's fees | 2,000 | 1,000 |
During the period materials amounting to Rs 9,000 have been transferred from Contract A to Contract B.
You are required to show:
(Madras, 1998)
[Ans: Contract A—Notional profit: Rs 60,000; Profit credited to profit and loss account: Rs 36,000; Contract B—Loss, fully transferred to profit and loss account: Rs 5,000; Contractee's account balance—A: Rs 3,78,000; B: Rs 1,25,000; Work-in-progress shown in balance sheet: Total: Rs 61,000; A—Rs 41,000; B—Rs 20,000]
Three contracts X, Y and Z commenced on 1st January, 1st July and 1st October 1998, respectively, were undertaken by the Sampath Contractors Limited, and their accounts on 31st December showed the following position:
The plant was installed on the date of commencement of each contract; depreciation is to be taken at 10% p.a.
Prepare the contract accounts in tabular from and show how they would appear in the balance sheet as on 31st December 1998.
[Ans: X—Notional profit: Rs 36,000; Profit taken to profit and loss account: Rs 18,000; Y—Loss taken fully to profit & loss account: Rs 12,000; Z—Notional profit: Rs 6,000; Profit taken to profit and loss account: Nil; Work-in-progress in balance sheet—Total: Rs 2,06,200; X—Rs 94,000; Y—Rs 96,000; Z—Rs 16,200]
Continuing contracts (or) contracts spreading over two or more accounting years.
1986 Rs | 1987 Rs | |
---|---|---|
Materials issued | 3,00,000 | 84,000 |
Direct wages | 2,30,000 | 1,05,000 |
Direct expenses | 22,000 | 10,000 |
Indirect expenses | 6,000 | 1,400 |
Work certified | 7,50,000 | 10,00,000 |
Work uncertified | 8,000 | – |
Materials at site | 5,000 | 7,000 |
Plant issued | 14,000 | 2,000 |
Cash received from contractee | 6,00,000 | 10,00,000 |
The value of the plant at the end of 1986 and 1987 was Rs 7,000 and Rs 5,000, respectively.
Prepare (i) contract account and (ii) contractee's account for the two years 1986 and 1987 taking into consideration such profit for transfer to profit and loss account as you think proper.
(Madras, 1990)
[Ans: For 1986: Notional profit: Rs 1,98,000; Profit taken to profit and loss account: Rs 1,05,600; For 1987: Profit on contract, fully taken to profit and loss account: Rs 1,32,000]
The value of plant at the end of 1996, 1997 and 1998 was Rs 8,000, Rs 5,000 and Rs 2,000 respectively.
Prepare contract account for the three years in the books of Murugan Construction Company.
[Ans: 1984—Loss transferred to profit & loss account: Rs 7,000; 1985—Notional profit: Rs 1,57,500; Profit credited to profit & loss account: Rs 94,500; Profit kept in reserve: Rs 63,000; 1986—Profit made, fully transferred to profit and loss account: Rs 82,500]
The contract price was Rs 12,00,000. Cash received was 80% of work certified.
(Madras, 1987)
Ans:
Escalation clause
The following are the details relating to the contract for the year ended 31st December 1998
Rs | |
---|---|
Contact price | 3,00,000 |
Material issued | 60,000 |
Wages | 80,000 |
Overheads | 5,000 |
Plant installed at the site | 10,000 |
Material in hand as on 31-12-98 | 5,000 |
Work certified | 2,00,000 |
Cash received | 1,60,000 |
Depreciate plan at 10% p.a. | |
Work done but not certified | 5,000 |
Prepare contract account and show the profit to be taken to profit and loss account.
[Ans: Notional profit: Rs 73,982; Profit transferred to profit and loss account: Rs 39,457; Compensation for escalation in prices, to be credited to the contract account: On material: Rs 4,067; On wages: Rs 5,915; Total: Rs 9,982]
Hint: Escalation compensation is on material consumed.
The following are the details relating to the contract for the year ended 31-12-1997.
Rs | |
---|---|
Contact price | 4,00,000 |
Material sent to site | 78,800 |
Wages | 1,26,500 |
Sundry expenses | 8,000 |
Plant installed at site | 20,000 |
Materials on hand | 4,000 |
Work certified | 2,40,000 |
Cash received in respect thereof | 1,80,000 |
Work uncertified | 6,000 |
Depreciation on plant at 10% p.a.
Prepare contract account and show the profit to be taken to profit and loss account.
(C.A. Adapted)
[Ans: Notional profit: Rs 55,654; Profit credited to profit & loss account: Rs 27,827; Escalation compensation to be credited to contract account: On material: Rs 5,385; On wages: Rs 15,569; Total: Rs 20,954]
Hint: For ascertaining escalation compensation, material consumed, i.e. 78,800 − 4,000 = Rs 74,400 should be taken.
1. How much of profit, if any, would you allow to be considered in the following case?
Rs | ||
---|---|---|
Contract cost | 2,80,000 | up-to-date |
Contract value | 5,00,000 | |
Cash received | 2,70,000 | |
Uncertified work | 30,000 | |
Deduction from bills | ||
By way of security | 10% |
Ans:
2. The following was the expenditure on a contract for Rs 12,00,000 commenced in January.
Rs | |
---|---|
Materials | 2,40,000 |
Wages | 3,28,000 |
Plant | 40,000 |
Overheads | 17,200 |
Cash received on account of the contract up to 31st December was Rs 4,80,000 being 80% of the work certified. The value of materials in hand was Rs 20,000. The plant had undergone 20% depreciation.
Prepare contact account
(CAQ3. (a), Dec ‘08/Paper-8)
Ans:
3. On 1st January, A undertook a contract for Rs 5,00,000. He incurred the following expenses during the year:
Rs | |
---|---|
Materials issued from stores | 50,000 |
Material purchased for the contract | 45,000 |
Plant installed at cost | 35,000 |
Wages paid | 1,00,000 |
Wages occurred due on 31st December | 40,000 |
Direct expenses paid | 10,000 |
Direct expenses accrued due on 31st December | 2,500 |
Establishment | 6,500 |
Of the plant and materials charged to the contract, the plant which cost Rs 2,000 and the materials costing Rs 1,500 were lost. Some of the materials costing Rs 2,000 were sold for Rs 2,500. On 31st December, the plant, which cost Rs 500, was returned to the stores, and a part of the plant, which cost Rs 200, was damaged, rendering itself useless.
The work certified was Rs 2,40,000 and 80% of the same was received in cash. The cost of work done, but uncertified was Rs 1,000. Charge 10% p.a. depreciation on plant and prepare the Contract
Account for the year ended 31st December, by transferring to the profit and loss account the portion of the profit, if any, which you think is reasonable. Show also the particulars relating to the contract in the balance sheet of the contractor as on 31st December.
4. M/s Anand Associates commenced the work on a particular contract on 1st April 1994. They close their books of accounts for the year on 31st December each year. The following information is available from their costing records on 31st December 1994.
Rs | |
---|---|
Materials sent to site | 43,000 |
Foreman's salary | 12,620 |
Wages paid | 1,00,220 |
A machine costing Rs 30,000 remained in use on site for 1/5th of the 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 he had devoted one-half of his time on the contract.
All other expenses were Rs 14,000. The materials on site were Rs 2,500. The contract price was Rs 4,00,000. On 31st December 1994, 2/3rd of the contract was completed; however, the architect gave a certificate only for Rs 2,00,000 on which 80% was paid. Prepare the contract account.
Ans:
To Profit and loss account | 35,682 | |
Balance c/d | 31,223 | ______ |
66,905 | 66,905 |
Work uncertified:
Net expenditure = Gross expenditure − Value of materials on hand
Rs 1,77,460 = Rs 1,79,960 – Rs 2,500
Rs 1,77,460 represents the cost of two-thirds of the work.
Therefore,
Therefore,
Therefore, the difference of 2/3 and ½ of contract price = Rs 1,77,460 − Rs 1,33,095 = Rs 44,365 (work not certified)
5. A company of contractors began to trade on 1st January 1994. During 1994, the company was engaged on only one contract of which the contract price was Rs 5,00,000.
Of the plant and materials charged to contract, plant costing Rs 5,000 and material costing Rs 4,000 were lost in an accident.
On 31st December 1994, plant costing Rs 5,000 was returned to the stores. Cost of work uncertified, but finished Rs 2,000 and materials costing Rs 4,000 were in hand on site.
Charge 10% depreciation on plant and compile contract account and balance sheet form the following:
Rs | Rs | |
---|---|---|
Share capital | 1,20,000 | |
Creditors | 10,000 | |
Cash received (80% of work certified) | 2,00,000 | |
Land and buildings | 43,000 | |
Bank balance | 25,000 | |
Charged to contract: | ||
Materials | 90,000 | |
Plant | 25,000 | |
Wages | 1,40,000 | |
Expenses | 7,000 | ________ |
3,30,000 | 3,30,000 |
Ans:
Balance sheet as on 31st December 1994
1,32,200 | 1,32,200 |
6. The following was the expenditure on a contract for Rs 6,00,000 commenced in January, 1997:
Material Rs 1,20,000; Wages Rs 1,64,400; Plant Rs 20,000; Business Charges Rs 8,600.
Cash received on account to 31st December, 1997 amounted to Rs 2,40,000 being 80% of work certified; the value of materials in hand on 31-12-1997 was Rs 10,000. Prepare the contract account for 1997 showing the profit to be credited to the year's profit and loss account. Plant is to be depreciated at 10%.
Ans:
7. A company undertook a contract for construction of a large building complex. The construction work commenced on 1st April 1997 and the following data are available for the year ended 31st March 1998.
The contractors own a plant, which originally cost Rs 20,00,000, has been continuously in use in this contract throughout the year. The residual value of the plant after 5 years of life is expected to be Rs 5,00,000. Straight-line method of depreciation is in use.
As on 31st March 1998, the direct wages due and payable amounted to Rs 2,70,000 and the materials at site were estimated at Rs 2,00,000.
Required:
Ans:
8. A firm of building contractors began to trade on 1st April 1997. The following was the expenditure on the contract for Rs 3,00,000: Materials issued to contract Rs 51,000; Plant used for contract Rs 15,000; Wages incurred Rs 81,000; Other expenses incurred Rs 5,000.
Cash received on account to 31st March 1998, amounted to Rs 1,28,000 being 80% of the work certified. Of the plant and materials charged to the contract, plant which cost Rs 3,000 and materials which cost Rs 2,500 were lost. On 31st March 1998, plant which cost Rs 2,000 was returned to store, the cost of work done but uncertified was Rs 1,000 and materials costing Rs 2,300 were in hand on site.
Charge 15% depreciation on plant, and take to the profit and loss account 2/3rd of the profit received. Prepare the contract account, contractee's account and balance sheet from the above particulars.
Ans:
9. Construction Limited is engaged on two contracts A and B during the year. The following particulars are obtained at the year-end (December 31):
Contract A | Contract B | |
---|---|---|
Date of commencement | April I Rs | September I Rs |
Contract price | 6,00,000 | 5,00,000 |
Materials issued | 1,60,000 | 60,000 |
Materials returned | 4,000 | 2,000 |
Materials at site (December 31) | 22,000 | 8,000 |
Direct labour | 1,50,000 | 42,000 |
Direct expenses | 66,000 | 35,000 |
Establishment expenses | 25,000 | 7,000 |
Plant installed at site | 80,000 | 70,000 |
Value of plant (December 31) | 65,000 | 64,000 |
Cost of contract not yet certified | 23,000 | 10,000 |
Value of contract certified | 4,20,000 | 1,35,000 |
Cash received from contractees | 3,78,000 | 1,25,000 |
Architect's fees | 2,000 | 1,000 |
During the period materials amounting to Rs 9,000 have been transferred from contract A to contract B. You are required to show: (a) contract accounts, (b) contractees’ accounts, and (c) extract from balance sheet as on December 31, clearly showing the calculation of work-in-progress.
Ans:
10. The following trial balance was extracted on 31st December 1997 from the books of Swastik Company Limited Contractors:
Rs | Rs | |
---|---|---|
Share capital: shares of Rs 10 each | 3,51,800 | |
Profit and loss account on 1st January 1997 | 25,000 | |
Provision for depreciation of 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 at site (cost) | 1,60,000 | ________ |
18,01,000 | 18,01,000 |
Contract 7 was begun on 1st January, 1997. 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 31st December, 1997, after the above trial balance was extracted, machinery costing Rs 32,000 was returned to stores, and materials when at site were valued at Rs 27,000.
Provision is to be made for direct labour due Rs 6,000 and for depreciation of all machinery at 12½% on cost.
You are required to prepare (a) the contract account, (b) a statement of profit, if any, to be properly credited to profit and loss account for 1997, and (c) the balance sheet of Swastik Company Limited as on 31st December.
Ans:
Balance sheet as on 31st December 1997
5,35,900 | 5,35,900 |
11. (Ascertainment of work uncertified) M/s Kishore & Company commenced the work on a particular contract on 1st April 1997. They close their books of accounts for the year on 31st December each year. The following information is available from their costing records on 31st December 1997:
Rs | |
---|---|
Material sent to site | 50,000 |
Wages paid | 1,00,000 |
Foreman's salary | 12,000 |
A machine costing Rs 32,000 remained in use on site for 1/5th of the 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 one-half of his time on the contract.
All other expenses were Rs 15,000. The material on site was Rs 9,000. The contract price was Rs 4,00,000. On 31st December, 1997, 2/3 of the contract was completed; however, the architect gave certificate only for Rs 2,00,000 on which 75% was paid.
Prepare the Contract Account.
Ans:
Working Notes:
Calculation of work uncertified
Rs | |
---|---|
Amount spent on contract | 1,87,200 |
Less: Material at site | 9,000 |
Net expenditure on contract | 1,78,200 |
Further expenditure to complete the contract, as the contract is 2/3rd completed
12. Deluxe Limited undertook a contract for Rs 5,00,000 on 1st July 1997. On 30th June 1998 when the accounts were closed, the following details about the contract were gathered:
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 raise 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 wages rates increased by 25%. The value of the work does not take into account the effect of the above clause.
Prepare the contract account working should form part of the answer.
Ans:
13. M/s Kishore and Company commenced work on a particular contract on 1st April 1990. They close their books of accounts for the year on 31st December each year. The following information is available from their closing records on 31-12-1996:
Rs | |
---|---|
Material sent to site | 50,000 |
Foreman's salary | 12,000 |
Wages paid | 1,00,000 |
A machine costing Rs 32,000 remained in use on site for 1/5th of the 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 one half of his time on the contract.
All other expenses were Rs 15,000. The material on site was Rs 9,000. The contract price was Rs 4,00,000. On 31st December, 2/3rd of the contract was completed. However, the architect gave certificate only for Rs 2,00,000 on which 75% was paid.
Prepare the contract account in the company's books.
(B.Com., Kerala, April 1993)
Ans:
Working Notes:
Computation of work uncertified
Total expenditure on the contract = Rs 1,87,200 − Rs 9,000 = Rs 1,78,200
which is 2/3rd completed
Therefore, total cost for full contract
Work certified Rs 2,00,000 is ½ of contract price of Rs 4,00,000
Net expenditure on contract till date = Rs 1,78,200
Less: Cost of work certified
Cost of work uncertified = Rs 44,550.
14. M/s Arun and Varun undertook a contract for Rs 2,50,000 for constructing a college building. The following is the information concerning the contract during the year 1997:
Rs | |
---|---|
Materials sent to site | 85,349 |
Labour engaged on site | 74,375 |
Plant installed at site at cost | 15,000 |
Direct expenditure | 3,167 |
Establishment charges | 4,126 |
Materials returned to stores | 549 |
Work certified | 1,95,000 |
Value of plant as on 31st December 1997 | 11,000 |
Cost of work not yet certified | 4,500 |
Materials at site 31st December 1997 | 1,883 |
Wages accrued 31st December 1997 | 2,400 |
Direct expenditure accrued 31st December 1997 | 240 |
Cash received from contractee | 1,80,000 |
Prepare contract account, contractee's account and show how the work-in-progress will appear in the Balance Sheet as on 31st December 1997.
(Madras, B.Com., April 2001)
Ans:
15. The following particulars are extracted from the books of a building contractor on 31-12-1991.
Materials | Rs |
---|---|
Purchased | 80,000 |
Transfer from other contracts | 2,00,000 |
Issued from central stores | 5,50,000 |
Wages | 8,75,000 |
Indirect expenses | 35,000 |
Inspection fees | 15,000 |
General stores | 40,000 |
Establishment charges | 66,000 |
Scrap (material sold) | 6,000 |
A cement mixing plant was purchased on 1st January 91 for Rs 80,000 and installation charges amounted to Rs 20,000. Of the plant and material charged to the contract, plant which cost Rs 3,000 and material which cost Rs 2,500 were lost. On June 30 plant was transferred to another contract. An additional plant was purchased on October 1, for Rs 2,00,000. Of the materials charged to contract, materials which cost Rs 5,000 were sold for Rs 5,500.
The contract price was Rs 50,00,000. Cash received on account till 31st December 1991 amounted to Rs 20,00,000 being 80% of work certified. The cost of work done but not certified was Rs 75,000. The value of material on hand was Rs 20,000. Charge depreciation on plant at 10% p.a.
Prepare contract account. Show how work-in-progress account will appear in the balance sheet on 31st December 1991.
(Mangalore, B.Com., May 1992)
Ans:
16. The expenditure on a contract till 31st March 1998 was Rs 2,00,000 and the work certified was Rs 3,00,000. The contract price is Rs 4,00,000 and the contractee paid Rs 2,50,000 till 31-3-1998. The cost of work done but not certified on that date amounted to Rs 40,000.
It is estimated that the contract will take further 4 months to complete and will necessitate an additional expenditure of Rs 40,000.
You are consulted as to the amount to be credited to profit and loss account on 31-3-1998. State the different amounts of profit that may reasonably be credited to the profit and loss account.
17. You are required to prepare a contract account for the year ending 31 December 1989 from the following particulars:
Rs | |
---|---|
Materials | 4,00,000 |
Wages | 5,00,000 |
Expenses | 1,00,000 |
Expenses occurred due | 20,000 |
Plant | 2,00,000 |
Work certified (90% received in cash) | 16,00,000 |
Materials at site (31-12-1989) Rs 40,000.
Depreciate plant by 10%. Ten per cent of the value of materials issued and 5% of the wages may be taken as incurred for the portion of the work completed, but not yet certified. Expenses are to be charged as a percentage to direct wages. Ignore depreciation on the uncertified portion of work. Ascertain the amount to be transferred to the profit and loss account.
(M.Com., SK University, 1990)
Ans:
Work uncertified is calculated as:
Rs | |
---|---|
Materials (10% of 4,00,000) | 40,000 |
Wages (5% of 5,00,000) | 25,000 |
Overheads (24% of 25,000) | 6,000 |
71,000 |
18. A building contractor furnishes the following records about a contract commenced on 1 April 1985. Expenses incurred on the contract up to 31 December 1985 were:
Rs | |
---|---|
Materials purchased | 21,500 |
Wages paid | 50,110 |
Foreman's salary | 6,310 |
Administrative expenses | 12,610 |
Machinery purchased | 15,000 |
A supervisor with a monthly salary of Rs 1,000 has spent about half of his time on this contract. Materials at site on 31-12-1985 were worth Rs 2,480. The machinery purchased was used for 73 days. The estimated life of the machine is five years and its scrap value is estimated at Rs 1,000.
The contract price is fixed at Rs 2,00,000. On 31 December 1985, two-thirds of the contract was completed. Work certified was worth Rs 1,00,000 and Rs 80,000 have been paid on account. Prepare the contract account.
Ans:
Working Notes:
(15,000 - 1,000)
Work certified
Work certified 1,00,000
Work uncertified
(1,34,000 – 1,00,000) = Rs 34,000
Reserve = Rs 30,015 – Rs 16,008 = Rs 14,007
3.15.206.105