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 * 9.1 Contract Account, Practical Problems and Solutions


9.1 CONTRACT ACCOUNT, PRACTICAL PROBLEMS AND SOLUTIONS


Leave a Comment / Financial Accounting II / By Ali Iftikhar

In this article, we are going to discuss 9. Contract Account, Practical Problems
and Solutions. In previous post we have discussed already about Contract
Account, Features of Contract Account, Cost-Plus Contract, Advantages,
Disadvantages, Example Problems. Contract Account is a topic of Advanced
Financial Accounting. It is an important topic included in final exam papers of
all leading universities such as Punjab University, University of Sargodha,
along with all major Indian Universities. Lectures with problem questions of
the Company Final Account, Accounting Ratios, and, Consignment Accounts are
already published on the site.

 * Contract Account, Practical Problems and Solutions
   * Problem No 7:
   * Problem No 8:
   * Problem No 9:
   * Problem No 10:
   * Problem No 11:
   * Problem No 12:

Written by Iftikhar Ali M.Sc Economics, M.Com (Finance) Lecturer Statistics,
Accounting and Finance


CONTRACT ACCOUNT, PRACTICAL PROBLEMS AND SOLUTIONS


PROBLEM NO 7:

The following particulars relate to a contract undertaken by Ali Developers
Engineers:

   
 * Material sent to site Rs. 85349
   
   
 * Labour engaged on site Rs. 74375
   
   
 *  Plant installed at cost Rs. 15,000
   
   
 * Direct Expenditure Rs. 3167
   
   
 * Establishment Charges Rs. 4126
   
   
 * Material returned to stores Rs. 549
   
   
 * Work certified Rs. 195,000
   
   
 * Cost of work not certified Rs. 4500
   
   
 * Material in hand at the end of the year Rs. 1883
   
   
 * Wages accrued at the end of the year Rs. 2400
   
   
 * Direct expenses accrued at the end of the year Rs. 240
   
   
 * Value of  plant at the end of year Rs. 11,000
   
   
 * The contract price has been agreed at Rs. 250,000
   
   
 * Cash received from contractee was Rs. 180,000
   

You are required to prepare Contract Account showing profit, Contractees’s
Account and to show suitable entries in the Balance sheet of contractor.

Solution:

Contract Account

ParticularsDr. Rs.ParticularsCr. Rs.Materials Sent on site85349Material
Closing1883Labor engaged on site           74375        Work in Process: Add
Outstanding                   240076775Work Certified
              195,000  Plant installed at cost15000Add Work Uncertified     
4500199500Direct Expenses                     3167 Material returned to
store549Add Outstanding                     2403407Ending Value of
 Plant11000Establishment Charges4126          Profit
c/d28275   212932 212932Profit & Loss Profit b/d28275(28275 (23)(180000195000) 
(28275\ \left( \frac{2}{3} \right)\left( \frac{180000}{195000} \right)\
(28275 (32 )(195000180000 ) 17400  Work in Progress
(Reserve)10875       28275 28275

Contractee’s Account

ParticularsDr. Rs.ParticularsCr. Rs.Balance c/d180,000Cash
A/c180,000     180,000 180,000

Balance Sheet

As on 31st December 2010

Liabilities   Rs.AssetsRs.Outstanding Wages2400Material in hand1883Outstanding
Direct Expenses240Work in Progress: Profit & Loss A/C             17400Work
Certified                          195,000              Work
Uncertified                           4500   Less Reserve for contingencies
 (10875)   Less Cash Received                  (180000)8625  Material in
store549   Plant11000


PROBLEM NO 8:

An expenditure of Rs. 194,000 has been incurred on a contract to the 31st March,
2010. The value of work done and certified is Rs. 220,000. The cost of work done
but not yet certified is Rs. 6,000. It is estimated that the contract will be
completed by 30th June 2010 and an additional expenditure of rs. 40,000 will
have to be incurred to complete the contract. The total estimated expenditure on
the contract is to include a provision of  for contingencies. The contract price
is Rs. 280,000 and Rs. 200,000 has been realized in cash upto 31st March 2010.
Calculate the proportion of profit to be taken to profit and loss account as on
31st March 2010.

Solution:

Computation of Estimated ProfitTotal Expenditure upto 31st March 2010194000Add
Estimated Additional Expenditure40,000 234,000Add Provision for
contingencies (234,00097.5)  \left( \frac{234,000}{97.5} \right)\ (97.5234,000
)  2.56000Estimated Total Expenditures240,000Contract Price280,000Estimated
Total Profit40,000

Computation of Profit & Loss on 31-03-2010

Estimated Total Profit (Work CertifiedContract Price)(Cash ReceivedWork Certified) 
Estimated\ Total\ Profit\ \left( \frac{Work\ Certified}{Contract\ Price}
\right)\left( \frac{Cash\ Received}{Work\ Certified} \right)\
Estimated Total Profit (Contract PriceWork Certified
)(Work CertifiedCash Received ) 



40000 (220000280000)(200000220000)=28571  40000\ \left( \frac{220000}{280000}
\right)\left( \frac{200000}{220000} \right) = 28571\ 40000 (280000220000
)(220000200000 )=28571 






PROBLEM NO 9:

A firm of building contractors began to trade on 1st April, 2009. The following
was the expenditure on the contract for Rs. 300,000

Material 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 by 31st March, 2010 amounted to Rs. 128,000, being 80%
of the work certified. Of the  plant and materials charged to the contract,
 plant which cost Rs. 3000 and materials which cost Rs. 2500 were lost. On 31st
March 2010 plant which cost Rs. 2000 was returned to stores, the cost of work
done but uncertified was Rs. 1000 and material costing Rs. 2300 were in hand on
site.

Charge 15% depreciation of plant and take to the profit and loss account 2/3 of
the profit received. Prepare a Contract Account, Contractee’s Account and
Balance sheet from the above particulars.

Solution:

Contract Account

ParticularsDr. Rs.ParticularsCr. Rs.Materials issued51000Material
Closing2300 Plant Used       15000Work in Process: Wages incurred81000Work
Certified               160,000 Other expenses incurred5000Add Work
Uncertified      1000161,000Depreciation on  Plant: Plant returned to
store2000(15000 – 3000)0.151800Plant lost3000  Material Lost2500  Plant at
site(15000 – 2000 – 3000)10000    Profit c/d27000   180800 180800Profit &
Loss Profit b/d27000(27000 (23)(0.80)  (27000\ \left( \frac{2}{3} \right)(0.80)\
(27000 (32 )(0.80) 14400  Work in Progress (Reserve)12600       27000 27000

Contractee’s Account

ParticularsDr. Rs.ParticularsCr. Rs.Balance c/d128,000Cash
A/c128,000     128,000 128,000

Balance Sheet

As on 31st December 2010

Liabilities   Rs.AssetsRs.Profit & Loss A/C              14400 Material in
hand2300Less Loss of  Plant              (3000) Work in Progress: Less Loss of
Material         (2500)8900Work Certified        
                 160,000              Work Uncertified                    
      1000   Less Reserve for contingencies  (12600)   Less Cash
Received                  (128000)20400   Plant Less Depreciation   (15,000 –
3000) – 180010200


PROBLEM NO 10:

A contractor makes up his accounts to December, 31 in each year. Contract No.
534 commenced on April 1, 2010. The cost records yield the following information
on December 31st 2010.

   
 * Material charged out to site                               Rs. 2150
   
   
 * Labour                                                             Rs. 5011
   
   
 * Foreman                                                          Rs. 631
   

A machine costing Rs. 1500 has been on site for 73 days. Its working life is
estimated at five years, its final scrap value of Rs. 100.

A supervisor, who is paid Rs. 1200 per annum, has spent approximately one half
of his time on this contract.

All other expenses and administration expenses amounted to Rs. 1261. Materials
in store at site at year end cost Rs. 248.

The contract price is Rs. 20,000. On 31st December, 2010 2/3 of the contract was
completed. Architect’s certificate has been issued covering Rs. 10,000 and Rs.
8000 has so far been paid on account.

Prepare a contract account and state how much profit or loss should be included
in respect of Contract No. 534 in the financial accounts to 31st December, 2010.

Hint: Cost of work uncertified Rs. 2328

Solution:

Contract Account

ParticularsDr. Rs.ParticularsCr. Rs.Materials charge2150Material
Closing248Labour5011Work in Process: Foreman631Work Certified              
10,000 Depreciation on Machine Add Work Uncertified     
2328123281500–1005=280, (280365)73  \frac{1500 – 100}{5} = 280,\ \left(
\frac{280}{365} \right)73\ 51500–100 =280, (365280 )73 56  Supervision
Expenses:   12002=600,(60012)9  \frac{1200}{2} = 600,\left( \frac{600}{12}
\right)9\ 21200 =600,(12600 )9 450  Other Expenses1261      Profit
c/d3017   12576 12576Profit & Loss Profit b/d30173017 (23)(800010000)  3017\
\left( \frac{2}{3} \right)\left( \frac{8000}{10000} \right)\ 3017 (32
)(100008000 ) 1609  Work in Progress (Reserve)1408       3017 3017

Working 1 Work CertifiedMaterials charge2150Labour5011Foreman631Depreciation on
Machine56Supervision Expenses450Other Expenses1261 9559Less Material at
site(248)Cost of 2/3 of contract9311Cost of Full Contract: (93112)3 \left(
\frac{9311}{2} \right)3 (29311 )313966.5Cost of Work
Certified: (1000020000)13966.5  \left( \frac{10000}{20000} \right)13966.5\
(2000010000 )13966.5 6983.25  Cost of 2/3 of contract9311Less Cost of work
certified(6983.25)Work uncertified2327.75




PROBLEM NO 11:

The following particulars relate to two houses which a firm of builders had in
course of construction under contract:

 House AHouse BWork-in-progress on 1st Jan, 2010 excluding Rs. 800 estimated
profit which was taken to profit & loss account in 2009.14,000 Material
Purchased23,00016,600Wages20,00014,000Electric Services and fittings1400300Road
making charges8000 Contract Price (including road making)60,00040,000Cash
Received upto 31st December, 201060,00024,000Percentage of Cash received to work
certified100%6623%  66\frac{2}{3}\%\ 6632 % Value of materials in hand on 31st
Dec, 2010400540Completed work not certified 2500Value of  plant used on
site12,0006000Period of  plant remained on sites during the year10 months8
months

The total establishment expenses incurred during the year 2010 amounted to Rs.
12240. These are to be charged to the two contracts in proportion to wages.
Depreciation of plant is to be taken into account at the rate of 10% per annum.

Prepare the two contract accounts (in columnar form) showing the profit or loss
on each house for the year 2010 and the sums which you consider appropriately
transferable to the profit and loss account.

Solution:

Contract Account

Particulars(A) Dr.(B)Cr.Particulars(A)Dr.(B)Cr.Work in Progress Opening
Including estimated Profit14800 Value of materials in hand on 31st Dec,
2010400540Material Purchased23,00016,600 Plant returned to store less
depreciation:  Wages20,00014,000A: (12000 x 0.10)10/12 = 1000  Electric Services
and fittings1400300(12,000 – 1000)11,000 Road making charges8000 B: (6000 x
0.10)8/12 = 1000  Establishment charges  (6,000 –
400) 5600(1224034000)20000,(1224034000)14000  \left( \frac{12240}{34000}
\right)20000,\left( \frac{12240}{34000} \right)14000\ (3400012240
)20000,(3400012240 )14000 72005040Work in Progress:  Value of  plant used on
site12,0006000Work Certified for A60,000    Work Uncertified for A0    Work
Certified for B:  Profit c/d 2700(2400066.67)100  \left( \frac{24000}{66.67}
\right)100\ (66.6724000 )100  36000   Work Uncertified for B 2500   Profit &
Loss A/c15000        8640044640 8640044640Profit & Loss Account:  Profit
b/d 27002700(2/3)(24000/36000) 1200   Work in Progress
(Reserve) 1500           2700  2700


PROBLEM NO 12:

The following information relates to a contract for Rs. 75,00,000 (the
contractee paying 90% of the value of work done as certified by the architect)

 200820092010Material9000001100000630000Wages9500001150000850000Direct
Expenses3500012500045000Indirect Expenses1500020000 Work
Certified175000056500007500000Work in Progress uncertified 100000  Plant
issued100000  

The value of  plant at the end of 2008, 2009 and 2010 was, respectively Rs.
80,000; Rs.50,000 and Rs. 20,000. Prepare the Contract Accounts for the year
2008, 2009 & 2010.

Solution:

Contract Account

DateParticularsAmountDateParticularsAmount2008Material9000002008Work in
Progress:  Wages950000 Work Certified1750000 Direct Expenses35000  Plant Value
at the end80000 Indirect Expenses15000 Profit & Loss A/C(Loss)170000 Plant
Issued100000           2000000  20000002009Work Certified17500002009Work in
Progress:  Plant Value at the end80000 Work
Certified5650000 Material1100000 Work in Progress
uncertified100000 Wages1150000  Plant Value at the end50000 Direct
Expenses125000    Indirect Expenses20000    Profit & Loss:     (1575000 x
2/3)0.90945000    WIP (Reserve)630000     5800000  5800000      2010Work in
Progress: 2010WIP (Reserve) b/d630000 Work Certified5650000 Contractee’s
A/c7500000 Work in Progress uncertified100000 Plant Value at the end20000 Plant
Value at the end50000    Material630000    Wages850000    Direct
Expenses45000          Profit & Loss A/C825000     8150000  8150000



You may also interested in the following topics:

9. Contract Account, Features of Contract Account, Cost-Plus Contract,
Advantages, Disadvantages, Example Problems

Consignment Account, Consignor or principal, Consignee or agent, Complete
Analysis with Journal Entries, Theoretical Aspect, MCQ’s and Practical Examples

Analysis of Accounting Ratios, Liquidity Ratios, Profitability Ratios, Solvency
Ratios, Efficiency Ratios, Market Ratios, Return on Investment Ratios, Different
Ratios and their Formulas, Practice Questions for Understanding

Analysis of Accounting Ratios, Exercise Problem Questions & their solutions

4: Company Final Accounts, Trading Profit & Loss Account, Income Statement,
Profit & Loss Appropriation Account, Statement of Financial Position or Balance
Sheet, with examples for understanding

4.1: Company Final Account, Exercise Problems and their solutions

    
 1. Material Costing, Specific Identification Method, Weighted Average Cost
    Method, First In, First Out Method(FIFO), Last In, Fist Out Method(LIFO)
    
    
 2. Material Costing, Economic Order Quantity EOQ, Reorder Point/Ordering Point,
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    Stock Level, Safety Stock, Danger Level, Optimum number of Orders, Order
    Frequency
    

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