9.1 Contract Account, Practical Problems and Solutions

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 UniversityUniversity of Sargodha, along with all major Indian Universities. Lectures with problem questions of the Company Final AccountAccounting Ratios, and, Consignment Accounts are already published on the site.

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.


Contract Account

ParticularsDr. Rs.ParticularsCr. Rs.
Materials Sent on site85349Material Closing1883
Labor engaged on site           74375        Work in Process: 
Add Outstanding                   240076775Work Certified               195,000 
Plant installed at cost15000Add Work Uncertified      4500199500
Direct Expenses                     3167 Material returned to store549
Add Outstanding                     2403407Ending Value of Plant11000
Establishment Charges4126  
Profit c/d28275  
 212932 212932
Profit & Loss Profit b/d28275
(28275\ \left( \frac{2}{3} \right)\left( \frac{180000}{195000} \right)\ 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 hand1883
Outstanding 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

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.


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

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 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.


Contract Account

ParticularsDr. Rs.ParticularsCr. Rs.
Materials issued51000Material Closing2300
Plant Used       15000Work in Process: 
Wages incurred81000Work Certified               160,000 
Other expenses incurred5000Add Work Uncertified      1000161,000
Depreciation on Plant: Plant returned to store2000
(15000 – 3000)0.151800Plant lost3000
  Material Lost2500
  Plant at site(15000 – 2000 – 3000)10000
Profit c/d27000  
 180800 180800
Profit & Loss Profit b/d27000
(27000\ \left( \frac{2}{3} \right)(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 hand2300
Less 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


Contract Account

ParticularsDr. Rs.ParticularsCr. Rs.
Materials charge2150Material Closing248
Labour5011Work in Process: 
Foreman631Work Certified               10,000 
Depreciation on Machine Add Work Uncertified      232812328
\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 Expenses1261  
Profit c/d3017  
 12576 12576
Profit & Loss Profit b/d3017
3017\ \left( \frac{2}{3} \right)\left( \frac{8000}{10000} \right)\ 1609  
Work in Progress (Reserve)1408  
 3017 3017
Working 1 Work Certified
Materials charge2150
Depreciation on Machine56
Supervision Expenses450
Other Expenses1261
Less Material at site(248)
Cost of 2/3 of contract9311
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 contract9311
Less 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 B
Work-in-progress on 1st Jan, 2010 excluding Rs. 800 estimated profit which was taken to profit & loss account in 2009.14,000 
Material Purchased23,00016,600
Electric Services and fittings1400300
Road making charges8000 
Contract Price (including road making)60,00040,000
Cash Received upto 31st December, 201060,00024,000
Percentage of Cash received to work certified100% 66\frac{2}{3}\%\
Value of materials in hand on 31st Dec, 2010400540
Completed work not certified 2500
Value of plant used on site12,0006000
Period 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.


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, 2010400540
Material Purchased23,00016,600Plant 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
\left( \frac{12240}{34000} \right)20000,\left( \frac{12240}{34000} \right)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 \left( \frac{24000}{66.67} \right)100\  36000
   Work Uncertified for B 2500
   Profit & Loss A/c15000 
 8640044640 8640044640
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)

Direct Expenses3500012500045000
Indirect Expenses1500020000 
Work Certified175000056500007500000
Work 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.


Contract Account

2008Material9000002008Work in Progress: 
 Wages950000 Work Certified1750000
 Direct Expenses35000 Plant Value at the end80000
 Indirect Expenses15000 Profit & Loss A/C(Loss)170000
 Plant Issued100000   
  2000000  2000000
2009Work 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   
 Direct Expenses45000   
 Profit & Loss A/C825000   
  8150000  8150000

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