10

Contract Costing

10.1 INTRODUCTION

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.

10.2 MEANING OF CONTRACT COSTING

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:

1. A high price.
2. The period taken for completion is in years.
3. The place of work and office may be in different places.
4. The work in connection with each contract is carried out at the site of the contract.
5. The expenses incurred by the contractor are considered as direct.
6. The indirect expenses, mostly consists of office expenses of the yards, stores and works.
7. A separate account is usually maintained for each contract.
8. The cost unit in contract costing is the contract itself.

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.

10.2.1 Accounting procedure of contract costing

1. Contract account. All costs relating to a particular contract are recorded in the individual contract account.
2. Materials. Material purchased and directly supplied to a contract is debited to a contract account. Any material returned to stores is credited to the contract account.
3. Labour. All the labour engaged on a particular work is directly allocated to work and is debited to the contract account.
4. Plant and machinery. Purchased value of plant is debited and depreciated value of plant is credited to the contract account.
5. Direct expenses. All direct expenses are debited to the contract account.
6. Indirect expenses. All indirect expenses are debited to the contract account.
7. Work-in-progress. Work-in-progress consists of work certified and work uncertified. Both these are shown in the credit side of the contract account.
8. Work completed. It is the extent to which the agreed work is executed or done

    

   

    

9. Work certified. It is that portion of the work completed, which is approved by the contractee or architect. Work certified represents that portion of the contract that has been duly approved by the architect or the contractee. This is denoted in terms of money value in contract account and appears on the credit side of the contract account.
10. Work uncertified. It is that portion of the work completed, which is not approved by the contractee or architect. It is the work done but uncertified. Work uncertified refers to that portion of work completed by the contractor but disapproved by the architect on the ground that it has not reached a stipulated stage. The value of work uncertified also appears on the credit side of the contract account.
11. Retention money. Money withheld by the contractee is known as retention money. The purpose of retaining some amount is to ensure that the contractor has performed all work relating to contract on the most satisfactory manner and that no repair work arises within agreed time limit.
12. Cost plus contract. They are also known as Lime and Line Contracts. These types of contracts are given where it is extremely difficult to carry out the work due to economical, political or social reasons or the contractor is undertaking a contract, which has no precedence, i.e. no one has ever done this type of contract or there is an urgency of the contract to be done. In this case, the contractor charges a specified percentage of cost plus cost as his contract price.

    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.

13. Escalation clause. Due to raise in the prices of materials and labour costs, the contract price is altered so that neither party suffers the loss arising out of the change in price level. To protect the interest of the parties concerned, a special clause is introduced known as escalation clause. Under which, the contractee will be obliged to pay the increased price of the contract because of increase in the rates of materials, labour and other expenses. Similarly, to protect the interest of the contractee against the fall in the rates of materials, labour and overheads, a ‘de-escalation clause’ is inserted. However, it is to be noted that the terms and conditions under which the contract price is to be altered is to be specifically mentioned.

14. Profit on incomplete contracts. Big contract take several year for completion. The exact amount of profit can be ascertained only after the completion of the contract. But one has to ascertain profit at the end of every financial year when the work is in progress. Such profits are only anticipated, and are known as “notional profits”.

10.2.2 Treatment of profit on incomplete contract

1. If the work completed is ¼ or less than ¼ of the total work, no profit should be transferred to profit and loss account.
2. If the work completed is more than ¼ but less than ½, 1/3rd of the notional profits are credited by using the following formula.

    

   

    

3. If the work completed is ½ or more than ½, 2/3rd of the notional profits are credited by using the formula

    

   

    

Format of a 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

10.2.3 Contract lasting for more than one year

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.

1. Previous year work-in-progress should be carried forward to the following year (debited).
2. Closing balance of plant and material at site should be carried forward (debited).

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:

 

 

Problem 2. The contract ledger of a company showed the following expenditure on account of contract number 12345 on 31^st March 1998.

 

	Rs
Materials	1,88,000
Plant	24,000
Wages	2,06,000
Establishment charges	13,400

The contract commenced on 1^st 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 1^st 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 31^st 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 31^st 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 31^st December.

Solution:

 

 

 

 

Problem 3. A contractor obtained a contract for Rs 6,00,000 on 1^st January 1988. The expenses incurred during the year ended 31^st 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 31^st 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 1^st April 1994. They close their books of accounts for the year on 31^st December each year. The following information is available from their costing records on 31^st 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 31^st 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.

 

 

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 31^st 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 1^st 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 31^st 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:

 

 

 

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:

1. Contract account
2. Contractee's account
3. Extracts from the balance sheet as on 31^st December, clearly showing the calculation of work-in-progress.

(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 31^st 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:

 

 

Problem 6. The following are the particulars relating to a contract, which was begun on 1^st 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 1^st April 1997 and the following data are available for the year ended 31^st 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 31^st 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:

1. Prepare the contract account for the year ended 31^st March 1998.
2. Show the calculation of profit to be taken to the profit and loss account of the year.
3. Show the relevant balance sheet entries.

(C.A. Inter)

Solution:

 

 

 

 

 

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:

1. The amount that accrued as on 31^st December 1994 were wages: Rs 900 and direct expenses: Rs 1,200.
2. The cost of the work uncertified included: materials: Rs 2,600, wages: Rs 1,000 and expenses: Rs 1,500.
3. Rs 2,000 worth of plant was sold for Rs 3,000 and Rs 3,000 worth of materials were destroyed by the fire.
4. Rs 5,000 worth of plant was sold for Rs 3,000 and materials costing Rs 5,000 were sold for Rs 6,000.
5. Depreciation till 31^st December 1994 on plant was Rs 10,000.
6. Materials at site were valued at Rs 5,000.
7. Cash received from the contractee was Rs 60,000 being 80% of the work certified.
8. Contract price was Rs 1,00,000.

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 1^st 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 31^st 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 31^st 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:

 

 

 

 

Problem 8. A firm of building contractors began to trade on 1^st 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 31^st 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 31^st 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:

 

 

 

Problem 9. Two contracts that commenced on 1^st January and 1^st July 1994, respectively, were undertaken by a contractor and his accounts on 31^st 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 31^st 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 1^st 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 31^st 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 31^st December.

Solution:

 

 

Problem 10. The following trial balance was extracted on 31^st 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 1^st 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 31^st 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 31^st December.

Illustration 11

(Ascertainment of work uncertified) M/s Kishore & Company commenced the work on a particular contract on 1^st April 1997. They close their books of accounts for the year on 31^st December each year. The following information is available from their costing records on 31^st 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 31^st 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:

 

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 1^st July 1997. On 30^th 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:

 

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:

1. The work on the contract commenced on 1-10-1993.
2. The wages of the workers for a week and the salary of the supervisory staff for a month were due at the end of the period Rs 3,100.
3. The company writes off depreciation at 10% p.a. on its plants; and
4. The value of materials at site on 31-3-1994 was Rs 4,200.

[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 1^st April 1990. They close their books of accounts for the year on 31^st 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 31^st 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:

 

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 30^th 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 31^st December 1997.

(Madras, 2001)

Solution:

 

 

 

 

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 1^st 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 31^st 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 31^st December 1991.

(Mangalore, 1992)

Solution:

 

 

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 31^st 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:

 

 

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:

1. 

   In this case, reserve = Rs 1,60,000 – Rs 1,35,111 = Rs 24,890

2. 

   Profit in reserve = Rs 1,60,000 – Rs 1,18,222 = Rs 41,778

3. 

   Profit in reserve = Rs 1,60,000 – Rs 1,46,155 = Rs 13,845

4. 

   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:

 

 

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 31^st 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 31^st 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:

 

 

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

CHAPTER SUMMARY

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.

KEY FORMULAE

1. If the work completed is less than ¼th of the contract value, the profit to be transferred to the profit and loss account is nil.
2. If the work completed is between ¼ and ½, the profit to be transferred to the profit and loss account is notional profit × 1/3 × (cash received/work certified).
3. If the work completed is >50%, notional profit × 2/3 × (cash received/work certified).

For the contracts, which are almost complete, any one of the following formula can be used for calculation of profit.

1. 
2. 
3. 
4. 

(Estimated profit = Contract price − (Total expenditure + Provision for contingency))

Work-in-progress = Work certified + Work uncertified − (Cash received + Profit reserve), i.e. unrealised profit.

EXERCISE FOR YOUR PRACTICE

Objective Type Questions

I. State whether the following statements are True or False:

1. In cost-plus contracts, the contractor runs a risk of incurring a loss.
2. The contract, which is complete up to one fourth, one fourth of the profit can be transferred.
3. In contract costing profit of each contract is computed when the contract is completed.
4. Contract costing is suitable where the products differ.
5. Contract costing and job costing are the same.
6. In contract costing payment of cash to the contractor is made on the basis of certified work.
7. When the completion stage of a contract is less than ¼, the total expenditure on the contract is transferred to work-in-progress account

8. In cost plus contracts, the contractor will get cost plus a stipulated profit.
9. Final contract price to be paid is certain in cost plus contracts.
10. Escalation clause in a contract provides that the contract price is fixed.

[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:

1. In contract costing, contract account is prepared by
   1. contractee
   2. contractor
   3. both a & b
   4. none of these.
2. Contract price is not fixed in case of
   1. de-escalation clause
   2. cost plus contracts
   3. escalation
   4. all the above.
3. When a contract is 50% complete, the amount of profit to be taken to the credit is
   1. estimated profit
   2. 50% of the estimated profit
   3. 2/3 of estimated profit × cash ratio
   4. 1/3 of estimated profit × cash ratio.
4. When contract is not complete at the end of the financial year, loss on incomplete contract is
   1. transferred to profit and loss
   2. debited to profit and loss
   3. transferred to work-in-progress
   4. transferred to work-in-progress and profit and loss.
5. Profit on incomplete contract is termed as
   1. notional profit
   2. costing profit
   3. gross profit
   4. net profit.
6. Work-in-progress in contract account consists of
   1. work certified and profit carried forward
   2. work certified
   3. work certified and work uncertified
   4. work certified, work uncertified and profit carried forward.
7. Contract costing is a basic method of
   1. financial costing
   2. job costing
   3. specific order costing
   4. batch costing.
8. In contract costing the cost unit is
   1. job
   2. batch
   3. unit produced
   4. contract.
9. A contact that guarantees a certain percentage of profit is known as
   1. incomplete contract
   2. cost plus contracts
   3. work-in-progress
   4. finished goods.
10. The escalation clause in contracts are often provided as safeguards against any likely changes in
    1. price of material
    2. price of labour
    3. both a & b
    4. none of these.

[Ans: 1 — (b), 2 — (d), 3 — (c), 4 — (a), 5 — (a), 6 — (d), 7 — (c), 8 — (d), 9 — (b), 10 — (c)]

DISCUSSION QUESTIONS

Short Answer-Type Questions

1. What do you mean by notional profit?
2. How are accounts prepared when contract lasts for more than a year?
3. What is work-in-progress?
4. What is work uncertified?

Essay-Type Questions

1. What are the main features of cost-plus contract?
2. What is escalation clause?
3. What do you mean by profit on incomplete contracts?
4. How do you fix up the amount of profit to be transferred to profit and loss account?
5. Write a note on the following:
   1. work certified
   2. retention money
   3. percentage of work completed

PROBLEMS

Simple Finished Contracts

1. Senthil Construction Company undertook a contract for constructing a building from 1^st January 1998. The contract price was Rs 1,00,000. He incurred the following expenses.

   	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 30^th 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]

2. The following is the summary of transactions as on 31st December 1991, relating to a special contract completed during the year.

   	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]

3. The following information relates to contract no.123. You are required to prepare the contract account and contractee's account assuming that the amount due from the contract was fully received.

   		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]

4. A building contractor took a contract for the construction of a certain building on 1st January 1994. The contract price was agreed at Rs 4,00,000. The contractor had made the following expenditure during the year.

    

   

    

   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]

5. 'A’ undertook several large contracts and his ledger contained therefore a separate account for each contract. On 31-12-1991, the account of contract number 22 showed the following amounts as expended thereon.

   	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]

6. A firm of builders, carrying on large contracts, kept in a contract ledger separate accounts for each contract. On 30^th June 1994, the following was shown as being the expenditure in connection with a contract:

   	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 1^st 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 30^th 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 30^th 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]

7. M/s Pari & Company obtained a contract for building a factory for Rs 10,00,000. Building operations started on 1st April 1984 and at the end of March 1985, they received from the contractee a sum of Rs 3,90,000 being 75% of the amount due on surveyor's certificate. The following additional information is given from the books of Pari & Company Limited.

   	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]

8. Ashok Builders undertook several large contracts and their ledger therefore, contained a separate account for each contract. On June 30th 1994, the account of contract number 75 showed the following amounts as expended thereon:

   	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 30^th 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]

9. The contract ledger of a company showed the following expenditure on account of a contract on 31^st December.

   	Rs
   Materials	60,000
   Plant	10,000
   Wages	82,200
   Establishment charges	4,300
   	1,56,500

   The contract was commenced on 1^st 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 31^st 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]

10. A firm of large contractors kept separate accounts for each contract. On 31.12.1992 the following were shown as being the expenditure in connection with contract number 101:

    	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]

11. A undertook several large contracts, and his ledger, therefore, contained a separate account for each contract on 30^th June. The account of contract number 51 showed the following as expended thereon.

    	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 30^th 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]

12. M/s Anil & Company, a firm of building contractors undertook a contract for construction of a commercial complex on 1^st January 1997. The following was the expenditure on the contract for Rs 9,00,000.

    	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 31^st 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.

     

13. Work certified is less than half of the value of contract. The Kedar accepted a contract for the construction of a building for Rs 10,00,000, the contractee agreeing to pay 90% of work certified as complete by the architect. During the first year, the amounts spent were.

     

    

     

    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 31^st 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]

14. (Valuation of work uncertified)

    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]

15. A building contractor having undertaken construction work at a contract price of Rs 5,00,000 began the execution of the work on 1^st January 1981. The following are the particulars of the contract up to 31^st December 1981.

    	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]

16. On 1^st 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
    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 31^st 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 31^st 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 31^st 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]

17. (Two or more contracts)

    Mr Ram undertook two contracts that commenced on 1^st January 1998 and 1^st July 1998, respectively. The accounts on 31^st 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]

18. (Two or more contracts)

    During 1997, Indian Contractors Limited undertook two contracts, the first on 1^st July 1997 and the second on 30^th September 1997. On 31^st 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]

19. (Two or more contracts)

    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:

    1. Contract accounts
    2. Contractee's accounts
    3. Balance sheet extracts, showing work-in-progress clearly.

    (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]

20. (Two or more Contracts)

    Three contracts X, Y and Z commenced on 1^st January, 1^st July and 1^st October 1998, respectively, were undertaken by the Sampath Contractors Limited, and their accounts on 31^st 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 31^st 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.

21. The following information relates to a building contract for Rs 10,00,000.

    	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]

22. The following information relates to a contract for Rs 7,50,000 (the contractee paying 90% of the value of work done and certified by the Architect and rest on completion of the contract) of Murugan Construction Company.

     

    

     

    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]

23. From the following prepare contract account for three years 1984, 1985 and 1986.

     

    

     

    The contract price was Rs 12,00,000. Cash received was 80% of work certified.

    (Madras, 1987)

    Ans:

     

    

     

    Escalation clause

24. Andal Construction Company undertook a contract on 1-1-1998 for construction of a stadium, with an escalation clause which provides that if material prices and wage rates increase by more than 12%, the contractor gets compensation for 35% of such rise in the cost of material and wages beyond 12%. It was agreed that since signing of the agreement material prices and wage rates have gone up by 42% on an average. The value of work certified does not take into account the effect of escalation clause.

    The following are the details relating to the contract for the year ended 31^st 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.

25. New Vistas Builders Limited undertook a contract on 1^st January 1997 with an escalation clause. The clause provided that if material prices and wage rates increase by more than 10%, the contractor gets compensation for 60% of such rise in the cost of materials and 80% of such rise in wage rates beyond the 10% in each case. It is agreed that since the signing of the agreement till 31^st December 1997, the material prices had gone up by 25% and wage rates by 30%. The value of work certified does not take into account the effect of the escalation clause.

    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.

EXAMINATION PROBLEMS

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 1^st 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 31^st 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 31^st 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 31^st December.

4. M/s Anand Associates commenced the work on a particular contract on 1^st April 1994. They close their books of accounts for the year on 31^st December each year. The following information is available from their costing records on 31^st 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 31^st 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 31^st 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 31^st 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 1^st April 1997 and the following data are available for the year ended 31^st 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 31^st 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:

1. Prepare the contract account for the year ended 31^st March 1998.
2. Show the calculation of profit to be taken to the profit and loss account of the year.
3. Show the relevant balance sheet entries.

Ans:

8. A firm of building contractors began to trade on 1^st 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 31^st 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 31^st 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 31^st 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 1^st 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 31^st 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 31^st 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 1^st April 1997. They close their books of accounts for the year on 31^st December each year. The following information is available from their costing records on 31^st 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 31^st 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 1^st July 1997. On 30^th 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 1^st April 1990. They close their books of accounts for the year on 31^st 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 31^st 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 31^st 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 1^st 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 31^st 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 31^st December 1991.

(Mangalore, B.Com., May 1992)

Ans:

16. The expenditure on a contract till 31^st 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