CA Inter (New Syllabus) | Paper 5 | Advanced Accounting | Question Paper Solution

Question No. 1 is compulsory. Attempt any four out of remaining five questions. Working notes
should form part of your answer.

1. (a) (i) AP Ltd., a construction contractor, undertakes the construction of commercial complex for
Kay Ltd. AP Ltd. submitted separate proposals for each of 3 units of commercial complex. A single
agreement is entered into between the two parties. The agreement lays down the value of each of the
3 units, i.e. Rs. 50 Lakh, Rs. 60 Lakh and Rs. 75 Lakh respectively. Agreement also lays down the
completion time for each unit. Comment, with reference to AS-7, whether AP Ltd., should treat it as
a single contract or three separate contracts.
Solution: Provision of Accounting Standard(AS) – 7 As per AS 7 ‘Construction Contracts’, when a
contract covers a number of assets, the construction of each asset should be treated as a separate
construction contract when: (a) separate proposals have been submitted for each asset; (b) each asset
has been subject to separate negotiation and the contractor and customer have been able to accept or
reject that part of the contract relating to each asset; and (c) the costs and revenues of each asset can
be identified. In the given case, each unit is submitted as a separate proposal, which can be
separately negotiated, and costs and revenues thereof can be separately identified. Hence, each asset
will be treated as a “single contract” even if there is one single agreement for contracts. Therefore,
three separate contract accounts must be recorded and maintained in the books of AP Ltd. For each
contract, principles of revenue and cost recognition must be applied separately and net income will
be determined for each asset as per AS 7.
(ii) On 1st December, 2017, GR Construction Co. Ltd. undertook a contract to construct a building
for 45 lakhs. On 31st March, 2018, the company found that it had already spent Rs. 32.50 lakhs on
the construction. Additional cost of completion is estimated at Rs. 15.10 lakhs. What amount should
be charged to revenue in the final accounts for the year ended 31" March, 2018 as per provisions of
AS-7?
Solution: As per AS-7, “Construction Contracts” profit/loss to be taken to profit & Loss Account
and additional provision for foreseeable loss is calculated as follows:-
(i) Calculation of {f6ee2119f2ea20712eb918d1d90d2f9a7ee1f9943e6cce22895b0b4de281b8bb} of Completion:-
Total Cost Incurred till date x 100
Total Estimated Cost of completion
= 32,50,000 x 100
32,50,000 + 15,10,000
= 68.28{f6ee2119f2ea20712eb918d1d90d2f9a7ee1f9943e6cce22895b0b4de281b8bb}
(ii) Calculation of revenue to be recognized =
Contract Price x {f6ee2119f2ea20712eb918d1d90d2f9a7ee1f9943e6cce22895b0b4de281b8bb} of completion
= 45,00,000 X 68.28 {f6ee2119f2ea20712eb918d1d90d2f9a7ee1f9943e6cce22895b0b4de281b8bb} = 30,72,600
(iii) Calculation of loss recognised on contract
Contract Revenue recognised 30,72,600
Less:- Total cost incurred (32,50,000) = 1,77,400
(iv) Calculation of total expected loss on contract
Contract Price = 45,00,000
Less:- Total estimated cost to be incurred = 47,60,000
Total Expected loss on contract = 2,60,000
(v) Calculation of provision for expected loss:-

Total Expected loss on contract = 2,60,000
Less: Total loss recognised on contract = (1,77,400)
Provision for expected loss = 82,600
(vi) Loss of Rs. 2,60,000 (1,77,400 + 82,600) is be to recognized immediately by debiting into profit
& loss account

(b) Given below are the following information's of M/s B.S. Ltd.
(i) Goods of Z Rs. 50,000 were sold on 18-03-2018 but at the request of the buyer these were
delivered on 15-04-2018.
(ii) On 13-01-2018 goods of Rs. 1,25,000 were sent on consignment basis of which 20{f6ee2119f2ea20712eb918d1d90d2f9a7ee1f9943e6cce22895b0b4de281b8bb} of the
goods unsold are lying with the consignee as on 31-03-2018.
(iii) Rs. 1,00,000 worth of goods were sold on approval basis 01-12-2017. The period of approval
was 3 months after which they were considered sold. Buyer sent approval for 75{f6ee2119f2ea20712eb918d1d90d2f9a7