9.1 Contract Account, Practical Problems and Solutions

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.

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

Particulars	Dr. Rs.	Particulars	Cr. Rs.
Materials Sent on site	85349	Material Closing	1883
Labor engaged on site 74375		Work in Process:
Add Outstanding 2400	76775	Work Certified 195,000
Plant installed at cost	15000	Add Work Uncertified 4500	199500
Direct Expenses 3167		Material returned to store	549
Add Outstanding 240	3407	Ending Value of Plant	11000
Establishment Charges	4126


Profit c/d	28275
	212932		212932
Profit & Loss		Profit b/d	28275
$(28275\ \left( \frac{2}{3} \right)\left( \frac{180000}{195000} \right)\$	17400
Work in Progress (Reserve)	10875

	28275		28275

Contractee’s Account

Particulars	Dr. Rs.	Particulars	Cr. Rs.
Balance c/d	180,000	Cash A/c	180,000

	180,000		180,000

Balance Sheet

As on 31^st December 2010

Liabilities	Rs.	Assets	Rs.
Outstanding Wages	2400	Material in hand	1883
Outstanding Direct Expenses	240	Work in Progress:
Profit & Loss A/C	17400	Work Certified 195,000
		Work Uncertified 4500
		Less Reserve for contingencies (10875)
		Less Cash Received (180000)	8625
		Material in store	549
		Plant	11000

Problem No 8:

An expenditure of Rs. 194,000 has been incurred on a contract to the 31^st 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 30^th 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 31^st March 2010. Calculate the proportion of profit to be taken to profit and loss account as on 31^st March 2010.

Solution:

Computation of Estimated Profit
Total Expenditure upto 31^st March 2010	194000
Add Estimated Additional Expenditure	40,000
	234,000
Add Provision for contingencies
$\left( \frac{234,000}{97.5} \right)\$ 2.5	6000
Estimated Total Expenditures	240,000
Contract Price	280,000
Estimated Total Profit	40,000

Computation of Profit & Loss on 31-03-2010

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

40000\ \left( \frac{220000}{280000} \right)\left( \frac{200000}{220000} \right) = 28571\

Problem No 9:

A firm of building contractors began to trade on 1^st 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 31^st 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 31^st 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

Particulars	Dr. Rs.	Particulars	Cr. Rs.
Materials issued	51000	Material Closing	2300
Plant Used	15000	Work in Process:
Wages incurred	81000	Work Certified 160,000
Other expenses incurred	5000	Add Work Uncertified 1000	161,000
Depreciation on Plant:		Plant returned to store	2000
(15000 – 3000)0.15	1800	Plant lost	3000
		Material Lost	2500
		Plant at site(15000 – 2000 – 3000)	10000

Profit c/d	27000
	180800		180800
Profit & Loss		Profit b/d	27000
$(27000\ \left( \frac{2}{3} \right)(0.80)\$	14400
Work in Progress (Reserve)	12600

	27000		27000

Contractee’s Account

Particulars	Dr. Rs.	Particulars	Cr. Rs.
Balance c/d	128,000	Cash A/c	128,000

	128,000		128,000

Balance Sheet

As on 31^st December 2010

Liabilities	Rs.	Assets	Rs.
Profit & Loss A/C 14400		Material in hand	2300
Less Loss of Plant (3000)		Work in Progress:
Less Loss of Material (2500)	8900	Work Certified 160,000
		Work Uncertified 1000
		Less Reserve for contingencies (12600)
		Less Cash Received (128000)	20400
		Plant Less Depreciation
		(15,000 – 3000) – 1800	10200

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 31^st 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 31^st 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 31^st December, 2010.

Hint: Cost of work uncertified Rs. 2328

Solution:

Contract Account

Particulars	Dr. Rs.	Particulars	Cr. Rs.
Materials charge	2150	Material Closing	248
Labour	5011	Work in Process:
Foreman	631	Work Certified 10,000
Depreciation on Machine		Add Work Uncertified 2328	12328
$\frac{1500 – 100}{5} = 280,\ \left( \frac{280}{365} \right)73\$	56
Supervision Expenses:
$\frac{1200}{2} = 600,\left( \frac{600}{12} \right)9\$	450
Other Expenses	1261

Profit c/d	3017
	12576		12576
Profit & Loss		Profit b/d	3017
$3017\ \left( \frac{2}{3} \right)\left( \frac{8000}{10000} \right)\$	1609
Work in Progress (Reserve)	1408

	3017		3017

Working 1 Work Certified
Materials charge	2150
Labour	5011
Foreman	631
Depreciation on Machine	56
Supervision Expenses	450
Other Expenses	1261
	9559
Less Material at site	(248)
Cost of 2/3 of contract	9311
Cost of Full Contract:
$\left( \frac{9311}{2} \right)3$	13966.5
Cost of Work Certified:
$\left( \frac{10000}{20000} \right)13966.5\$	6983.25

Cost of 2/3 of contract	9311
Less Cost of work certified	(6983.25)
Work uncertified	2327.75

Problem No 11:

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

	House A	House B
Work-in-progress on 1^st Jan, 2010 excluding Rs. 800 estimated profit which was taken to profit & loss account in 2009.	14,000
Material Purchased	23,000	16,600
Wages	20,000	14,000
Electric Services and fittings	1400	300
Road making charges	8000
Contract Price (including road making)	60,000	40,000
Cash Received upto 31^st December, 2010	60,000	24,000
Percentage of Cash received to work certified	100%	$66\frac{2}{3}\%\$
Value of materials in hand on 31^st Dec, 2010	400	540
Completed work not certified		2500
Value of plant used on site	12,000	6000
Period of plant remained on sites during the year	10 months	8 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 Profit	14800		Value of materials in hand on 31^st Dec, 2010	400	540
Material Purchased	23,000	16,600	Plant returned to store less depreciation:
Wages	20,000	14,000	A: (12000 x 0.10)10/12 = 1000
Electric Services and fittings	1400	300	(12,000 – 1000)	11,000
Road making charges	8000		B: (6000 x 0.10)8/12 = 1000
Establishment charges			(6,000 – 400)		5600
$\left( \frac{12240}{34000} \right)20000,\left( \frac{12240}{34000} \right)14000\$	7200	5040	Work in Progress:
Value of plant used on site	12,000	6000	Work Certified for A	60,000
			Work Uncertified for A	0
			Work Certified for B:
Profit c/d		2700	$\left( \frac{24000}{66.67} \right)100\$		36000
			Work Uncertified for B		2500
			Profit & Loss A/c	15000

	86400	44640		86400	44640
Profit & Loss Account:			Profit b/d		2700
2700(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)

	2008	2009	2010
Material	900000	1100000	630000
Wages	950000	1150000	850000
Direct Expenses	35000	125000	45000
Indirect Expenses	15000	20000
Work Certified	1750000	5650000	7500000
Work in Progress uncertified		100000
Plant issued	100000

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

Date	Particulars	Amount	Date	Particulars	Amount
2008	Material	900000	2008	Work in Progress:
	Wages	950000		Work Certified	1750000
	Direct Expenses	35000		Plant Value at the end	80000
	Indirect Expenses	15000		Profit & Loss A/C(Loss)	170000
	Plant Issued	100000

		2000000			2000000
2009	Work Certified	1750000	2009	Work in Progress:
	Plant Value at the end	80000		Work Certified	5650000
	Material	1100000		Work in Progress uncertified	100000
	Wages	1150000		Plant Value at the end	50000
	Direct Expenses	125000
	Indirect Expenses	20000
	Profit & Loss:
	(1575000 x 2/3)0.90	945000
	WIP (Reserve)	630000
		5800000			5800000

2010	Work in Progress:		2010	WIP (Reserve) b/d	630000
	Work Certified	5650000		Contractee’s A/c	7500000
	Work in Progress uncertified	100000		Plant Value at the end	20000
	Plant Value at the end	50000
	Material	630000
	Wages	850000
	Direct Expenses	45000

	Profit & Loss A/C	825000
		8150000			8150000