Chapter 2. Contract Account

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1 Chapter 2 Contract Account FORMAT Cost of Material in a Contract I. DEBITED TO CONTRACT A/C. Cost of Material Issued from Stores Cost of Material Bought at Site Cost of Material Received From Another Contract II CREDITED TO CONTRACT A/C. Cost of Material Transferred to Another Contract Cost of Material Returned to Stores / Supplied Cost of Material Lost / Destroyed Cost of Material Sold Cost of Material in Closing Stock / At Site () COST OF MATERIAL [I II] Transfer to P & L Account % of Work Certified To Contract Price Transfer to Profit and Loss Account (1) Up to 25% NIL (2) Cash Received 3 X Notional Profit Work Certified (3) Cash Received 3 X Notional Profit Work Certified (4) Nearing Completion Cash Received Estimated Profit Contract Price (5) 100 Entire Profit WORK-IN-PROGRESS A/C. In Balance Sheet Value of Costing Stock of Materials at Site WDV of Special Plant at Site WDV of Plant (Capital Method) at Site Value of Work Completed and Certified Value of Work Completed but Uncertified Less : Reserve () Page 1

2 = Cost of Contract c/f Less : Cash Received from Contractee () Total CONTRACT ACCOUNT To Cost of Materials (From By Cost of Materials Stores / Bought / transferred (transferred /returned/lost/ from Contract No...) destroyed/sold) To Labour By Written Down value of Special To Direct Expenses Plant (transferred/returned) To Cost of Special Plant By Sale Price (Special Plant) To Indirect Expenses By Salvage/Scrap value/ Insurance Claim Received (Sp. Plant Lost/Destroyed) To Common Plant By Written Down Value of Common Plant Depreciation / User Charge (Capital Method)?Cost (Capital Method) (transferred/returned/lost/destroyed /sold) To National Profit c/d By Work-in-Progress c/d to B/S : - Materials at site - Plant at site (W.D.V.) - Work Certified - Work Uncertified To Profit & Loss A/c. (Credit taken) To Work-in-Progress c/d. to B/S (profit reserved) By National Profit b/d. IMPORTANT QUESTIONS Q. 1 Radha Construction Pvt. Ltd. obtained two contracts viz Contract P and Q. Contract P commenced on 1st April, 2016 and Contract Q commenced on 1st June, Following information is extracted from their books for the year ended 31st March, Contract P Contract Q Materials Issued (Rs) 44,50,000 49,50,000 Direct Wages (Rs) 27,40,000 32,35,000 Direct expenses (Rs) 12,33,000 9,47,500 Architect's fees (%) 4% on work certified 4% on work certified Sub Contract Charges (Rs) 7,33,500 4,54,700 Administrative overheads (Rs) 32,47,500 37,48,000 Plant issued at commencement (Rs) 50,00,000 60,00,000 Page 2

3 Contract Price (Rs) 2,50,00,000 3,00,00,000 Cash received (80% of work certified) (Rs) 90,00,000 1,44,00,000 Materials at site (Rs) 4,00,000 7,00,000 Materials returned to stores (Rs) 30,000 1,00,000 In the month of Jan, 2017, Material costing Rs 45,000 have been transferred to Contract P from Contract Q. Provide 20% p.a. on original cost of plant. Prepare Contract Accounts for the year ended 31st March, Solution In the Books of Radha Constructions Pvt. Ltd. Contract Accounts Contract P Contract Q to to Rs Rs Contract P Contract Q to to Rs Rs To Materials issued 44,50,000 49,50,000 By Materials Returned 30,000 1,00,000 To Direct Wages 27,40,000 32,35,000 By Materials transferred to Contract P 45,000 To Direct Expenses 12,33,000 9,47,500 By Work-in-Progress c/d To Architect s Fees (4%) 4,50,000 7,20,000 Work Certified 1,12,50,000 1,80,00,000 To Sub-Contract Charges 7,33,500 4,54,700 Materials at site 4,00,000 7,00,000 To Administrative 32,47,500 37,48,000 Plant at site (WDV) 40,00,000 50,00,000 Overheads To Plant Issued 50,00,000 60,00,000 By Profit & Loss A/c. (Loss) 22,19,000 To Contract Q (Material tfd.) 45,000 To Notional Profit c/d. 37,89,800 1,78,99,000 2,38,45,000 1,78,99,000 2,38,45,000 To Profit and Loss A/c. (See Note) 20,21,227 By Notional Profit b/d. 3 7,89,800 To Work-in-Progress 17,68,573 (Reserve) 37,89,800 37,89,800 Working Notes : 1. Calculation of Work Certified (Cash received 80% of Work certified) Contract P : Contract Q : Cash received = 80% of work certified Cash received Rs 90,00,000 = 80% of work certified Work certified = Rs 90,00, /80 = Rs 1,12,50,000 Cash received Rs 1,44,00,000 = 80% of work certified Work certified = Rs 1,44,00, /80 = Rs 1,80,00,000 Page 3

4 2. Depreciation Contract P : Original Cost on Rs 50,00,000 Less : 20% Depreciation (12 months) Rs10,00,000 WDV Rs40,00,000 Contract Q : Original Cost on Less : 20% Depreciation (10 months) WDV Rs60,00,000 Rs10,00,000 Rs50,00, Profit taken to Profit and Loss A/c Contract Price = Rs 3,00,00,000 Work certified = Rs 1,80,00,000 % of work certified to Contract price = 60% Profit = 2/3 Notional Profit Cash Received Work Certified = 2/3 Rs 37,89, = Rs 20,21,227 Q. 2 Prepare the Contract Accounts and Contractee s Accounts from the following information relating to a contract for 60,00,000, the contractee paying 80% of the value of work done as certified by the architect and the balance on completion. Years Materials Issued 7,20,000 8,80,000 5,04,000 Direct wages 6,24,000 7,05,200 6,20,800 Direct Expenses 28,000 1,00,000 36,000 Indirect Expenses 12,000 16,000 Nil Work Certified (Cumulative) 14,00,000 45,20,000 60,00,000 Architect's Fees 4% of work certified 4% of work certified 4% of work certified Work done but yet to be Nil 80,000 Nil certified Plant at commencement 80,000 Nil Nil Plant at the end of the year 64,000 40,000 16,000 Solution - Contract Account for the year Page 4

5 Rs Rs To Materials 7,20,000 By Closing Work-in-Progress To Direct Wages 6,24,000 Plant at site 64,000 To Direct Expenses 28,000 Work Certified 14,00,000 To Indirect Expenses 12,000 To Architect Fees 56,000 To Plant 80,000 By Profit & Loss A/c. (Loss) 22,19,000 15,20,000 15,20,000 Contract Account for the year Rs Rs To Opening Work-in-Progress By Closing Work-in-Progress Plant at site 64,000 Plant at site 40,000 Work Certified 14,00,000 Work Certified 45,20,000 To Materials 8,80,000 -Work Uncertified 80,000 To Direct Wages 7,95,200 To Direct Expenses 1,00,000 To Indirect Expenses 16,000 To Architect s Fees 1,24,800 To Notional Profit c/d. 12,60,000 46,40,000 46,40,000 To Profit and Loss A/c. 6,72,000 By Notional Profit b/d. 12,60,000 To Contingency Reserve 5,88,000 12,60,000 12,60,000 Profit taken to Profit and Loss A/c Contract Price = Rs 6,00,00,000 Work certified = Rs 45,20,000 % of work certified to Contract price = Work Certified X 100 Contract Price = 45,20,000 X 100 6,00,00,000 = % Profit = 2/3 Notional Profit Cash Received Work Certified = 2/3 Rs 12,60, = Rs 6,72,00 Contract Account for the year Rs Rs Page 5

6 To Opening Work-in-Progress By Closing Work-in-Progress Plant at site 40,000 Plant at site 16,000 Work Certified 45,20,000 Work Certified 60,00,000 -Work Uncertified 80,000 To Materials 5,04,000 To Direct Wages 6,20,800 To Direct Expenses 36,000 To Architect s Fees 59,200 To Profit and Loss A/c 1,56,000 60,16,000 60,16,000 Q. 3 Sealink Construction Company has undertaken three contracts during the year and following particulars are available as on 31st March, Contract X () Contract Y () Contract Z () Contract Price 1,00,00,000 2,50,00,000 75,00,000 Materials issued to Contract 16,52,000 22,45,000 18,96,000 Labour 10,28,000 12,65,000 12,55,000 Sub Contract Charges 8,48,000 8,39,000 4,35,000 Architect s Fees 3% of Work Certified 3% of Work Certified 3% of Work Certified Insurance Charges 30,000 61,000 74,000 Work Certified 40,00,000 50,00,000 50,00,000 Work Uncertified 3,50,000 4,00,000 2,50,000 Amount Received from Contractee 80% of Work Certified 90% of Work Certified 75% of Work Certified Closing Stock of Materials 90,000 1,00,000 2,00,000 All Contracts were commenced during the current year. Total depreciation on plants amounted to 1,12,000 and allocate the same to all contracts in the ratio of work certified. Prepare Contract Accounts, show the calculations of profits transferred to Profit & Loss A/c.Calculation should be made to the nearest rupee. Solution In the Books of Sealink Construction Company Contract X Account for the year ended 31st March, 2016 To Material Issued to Contract 16,52,000 By Work-in-Progress c/d To Labour 10,28,000 - Work Certified 40,00,000 To Sub-Contract Charges 8,48,000 - Work Uncertified 3,50,000 To Architect's Fees (3% on Work 1,20,000 - Closing Stock of Materials 90,000 Certified) To Insurance Charges 30,000 To Depreciation on Plant (8,000 4) 32,000 To Notional Profit c/d 7,30,000 Page 6

7 44,40,000 44,40,000 To Costing Profit and Loss Account 1,94,667 To Notional Profit b/d 7,30,000 To Reserve A/c. 5,35,333 7,30,000 7,30,000 Contract Y Account for the year ended 31st March, 2016 To Material Issued to Contract 22,45,000 By Work-in-Progress c/d To Labour 12,65,000 - Work Certified 50,00,000 To Sub-Contract Charges 8,39,000 - Work Uncertified 4,00,000 To Architect's Fees (3% on Work 1,50,000 - Closing Stock of Materials 1,00,000 Certified) To Insurance Charges 61,000 To Depreciation on Plant ( 8,000 40,000 5) To WIP (Reserve) 9,00,000 55,00,000 55,00,000 Contract Z Account for the year ended 31st March, 2016 To Material Issued to Contract 18,96,000 By Work-in-Progress c/d To Labour 12,55,000 - Work Certified 50,00,000 To Sub-Contract Charges 4,35,000 - Work Uncertified 2,50,000 To Architect's Fees (3% on Work 1,50,000 - Closing Stock of Materials 2,00,000 Certified) To Insurance Charges 74,000 To Depreciation on Plant (8,000 4) 40,000 To Notional Profit c/d 16,00,000 54,50,000 54,50,000 To Costing Profit and Loss Account 8,00,000 To Notional Profit b/d 16,00,000 To Reserve A/c. 8,00,000 16,00,000 16,00,000 Working Notes : 1. Depreciation on Plant (Work Certified Ratio 4 : 5 : 5) = 1,12,000 = 8, Amount of Profit to be transferred to Costing P & L A/c % of Work Certified to Contract Price Profit transferred X = 40,00, = 40% Profit = 1/3 7,30,000 80/100 1,00,00,000 = 1,94,667 Y = 50,00, = 20% 2,50,00,000 Profit transferred = NIL Page 7

8 Z = 50,00, = 66.67% Profit = 2/3 16,00,000 75/100 75,00,000 = 8,00,000 Q. 4 DSK Ltd. commenced a Contract on 1st April, The total Contract Price was for 35,00,000 and it is likely to be completed on 31st December, The actual expenditure upto 31st March, 2016 and subsequent estimated expenditure upto 31st December, 2016 are given below. Actual Expenditure upto () Estimated Expenditure from to () Materials Issued 9,20,000 6,37,000 Direct Labour 4,40,000 3,20,000 Sub Contract Charges 20,000 30,000 Chargeable Expenses 1,20,000 1,70,000 Plant Purchased 3,00,000 Plant returned to stores at the end of the period 1,00,000 2,00,000 (Original Cost) Architect s Fees (% of Work Certified) 4% 4% Work Certified (Cumulative) 20,00,000 35,00,000 Work Uncertified 50,000 Cash received 16,00,000 18,00,000 The Plant is subject to annual p.a. on original cost. It was decided that the profit to be taken credit for should be that portion of estimated net profit to be realized on completion of the contract which the certified value of work as on 31st March, 2016 bears to the total contract price. You are required to prepare Contract Account for the year ended 31st March, 2016 and show your calculation of profit to be credited to the Profit and Loss Account for the year ended 31st March, Calculation should be made to the nearest rupee. Solution - Contract Account for the period 1st April 2015 to 31st March, 2016 To Material Issued 9,20,000 By Plant returned to Store 80,000 (WDV) To Direct Labour 4,40,000 By Work-in-Progress c/d To Sub-Contract Charges 20,000 - Work Certified (Cumulative) 20,00,000 To Chargeable Expenses 1,20,000 - Work Uncertified 50,000 To Plant Purchased 3,00,000 - Plant at Site 1,60,000 To Architect's Fees (4% on Work 80,000 Certified) To Notional Profit c/d 4,10,000 Page 8

9 22,90,000 22,90,000 To Profit and Loss Account 3,50,286 By Notional Profit b/d 4,10,000 To Work-in-Progress Account 59,714 4,10,000 4,10,000 Memorandum Contract Account ( to ) to Total to To Materials Issued To Direct Labour To Sub-Contract Charges To Chargeable Expenses To Depreciation on Plant To Architects Fess ( 4%) To Estimated Profit Working Notes : 9,20,000 4,40,000 20,000 1,20,000 60,000 80,000 6,37,000 3,20,000 30,000 1,70,000 30,000 60,000 15,57,000 7,60,000 50,000 2,90,000 90,000 1,40,000 6,13, Depreciation on Plant Returned Cost 1,00,000 Less : 20% Depreciation (12 Months) 20,000 80, Plant at Site on 31st March, 2016 Cost 3,00,000 Less : Returned 1,00,000 By Contractee s A/c 35,00,000 35,00,000 35,00,000 2,00,000 Less : 20% Depreciation (12 Months) 40,000 1,60, Plant Returned to Stores on 31st December, 2016 Cost 2,00,000 Less : 20% Depreciation (21 months) 70,000 1,30, Profit taken to Profit and Loss A/c Profit = Estimated Profit Work Certified/Contract Price 6,13,000 20,00,000 35,00,000 = 35,00,000 Page 9

10 Q. 5 Following information relates to a building contract commenced on 1st April, 2013 for 10,00, () () Materials Issued 3,02,000 84,000 Direct Wages 2,00,000 1,00,000 Outstanding Wages 20,000 Sub Contract Charges 12,000 10,000 Indirect Expenses 10,000 General Expenses 6,000 1,400 Supervision Charges 10,000 5,000 Work Certified (Cumulative) 7,50,000 10,00,000 Work Uncertified 8,000 Materials at site at the end 5,000 Plant Issued 14,000 2,000 Materials Returned to Stores 2,000 5,000 Cash Received from the Contractee during the year 6,00,000 4,00,000 The value of Plant at the end of and was 7,000 and 5,000 respectively Prepare Contract Accounts for the years and Solution- Contract Account for the year ended 31st March, 2014 To plant Issued 14,000 By Materials Returned to Stores 2,000 To Materials Issued 3,02,000 By Work-in-Progress c/d To Direct Wages 2,00,000 - Work Certified (Cumulative) 7,50,000 To Outstanding Wages 20,000 - Work Uncertified 8,000 To Sub-Contract Charges 12,000 - Materials at Site 5,000 To Indirect Expenses 10,000 - Value of Plant 7,000 To General Expenses 6,000 To Supervision Charges 10,000 To Notional Profit c/d 1,98,000 7,72,000 7,72,000 To Costing Profit and Loss A/c 1,05,600 By Notional Profit b/d 1,98,000 To Work-in-Progress (Reserve) 92,400 1,98,000 1,98,000 Working Notes- Amount of Profit taken to Profit and Loss A/c Work Certified 7,50,000 Contract Price 10,00,000 % of Work Certified to Contract Price = 75% 2/3 Notional Profit Cash Received / Work Certified 2/3 1,98, / 7,50,000 = 1,05,600 Contract Account for the year ended 31st March, 2015 Page 10

11 To Work-in-Progress b/d By Work-in-Progress b/d 92,400 - Work Certified (Cumulative) 7,50,000 By Materials Returned to Stores 5,000 - Work Uncertified 8,000 By Contractee s A/c 10,00,000 - Materials at site 5,000 By Value of Plant 5,000 - Value of Plant 7,000 To Plant Issued 2,000 To Materials Issued 84,000 To Direct Wages 1,00,000 To Sub-Contract Charges 10,00 To General Expenses 1,400 To Supervision Charges 5,000 To Profit and Loss A/c (Profit) 1,30,000 11,02,400 11,02,400 Q 6 Saurav. Ltd. obtained two contracts viz. A and B. Contract A commenced on 1st October 2014 and Contract B started on 1st December, Following information was extracted from their books for the year ended 31st March, Contract A () Contract B () Contract Price 70,00,000 15,00,000 Cash Received 11,20,000 7,65,000 Plant issued at commencement 22,50,000 12,00,000 Work Certified 14,00,000 9,00,000 Work Uncertified 52,000 28,000 Direct Wages 2,95,000 1,77,500 Direct Expenses 1,36,500 30,700 Supervision Charges 27,500 22,500 Administrative Overheads 2,72,500 1,47,500 Sub-Contract Charges 63,700 Electricity Charges 48,800 Architect s Fees 52,000 27,000 Indirect Materials 1,47,000 1,62,600 Direct Materials 3,58,000 1,99,200 Direct Materials returned to Stores 14,000 Direct Materials at the site at the end of the period 73,000 54,000 Provide 20% p.a. on the original cost of Plant. Prepare Contract A and Contract B Account for the period ended 31st March, Solution - Contract A/c for the period ended 31st March, 2015 Contract Contract Contract A B A (6 (4 (6 Contract B (4 Page 11

12 months) months) months) months) To Plant Issued at By Direct Materials Commencement 22,50,000 12,00,000 Returned to Stores 14,000 - To Direct Materials 3,58,000 1,99,200 By Work-in- Progress To Direct Wages 2,95,000 1,77,500 - Work Certified 14,00,000 9,00,000 To Direct Expenses 1,36,500 30,700 - Work Uncertified 52,000 28,000 To Supervision 27,500 22,500 - Plant at Site 20,25,000 11,20,000 Charges (WDV) To Administrative - Direct Materials at Overheads 2,72,500 1,47,500 Site 73,000 54,000 To Sub-Contract Charges 63,700 - By Costing Profit and To Electricity Charges 48,800 - Loss A/c (Loss) 87,000 - To Architect s Fees 52,000 27,000 To Indirect Materials 1,47,000 1,62,600 To Notional Profit c/d - 1,35,000 36,51,000 21,02,000 36,51,000 21,02,000 To Costing Profit and By Notional Profit b/d 1,35,000 Loss A/c 76,500 To Work-in-Progress 58,500 c/d (Reserve) 1,35,000 1,35,000 Working Notes : 1. Depreciation on Plant A = 22,50,000 20/100 6/12 = 2,25,000 B = 12,00,000 20/100 4/12 = 80, Amount of Profit taken to Profit and Loss A/c (Contract B) Work Certified 9,00,000 Contract Price 15,00,000 % of Work Certified to Contract Price = 60% 2/3 Notional Profit x Cash Received / Work Certified 2/3 1,35,000 7,65,000 / 9,00,000 = 76,500 Page 12

CONTRACT COSTING. INTRODUCTION Contract or terminal costing is A form of specific order costing; attribution of costs to individual contracts.

CONTRACT COSTING. INTRODUCTION Contract or terminal costing is A form of specific order costing; attribution of costs to individual contracts. CONTRACT COSTING INTRODUCTION Contract or terminal costing is A form of specific order costing; attribution of costs to individual contracts. This method is used in case of big jobs described as contracts.