1,100 (a) Amount of foreseeable loss (Rs in lakhs) Total cost of construction (500 + 105 + 495) Less: Total contract price 1000 Total foreseeable loss to be recognized as expense 100 According to para 35 of AS 7 (Revised 2002), when it is probable that total contract costs will exceed total contract revenue, the expected loss should be recognized as an expense immediately. (b) Contract work-in-progress i.e. cost incurred to date are Rs. 605 lakhs (Rs in lakhs) Work certified 500 Work not certified 105 605 This is 55% (605/1,100 x 100) of total costs of construction. (c) Proportion of total contract value recognised as revenue as per para 21 of AS 7 (Revised). 55% of Rs. 1.000 lakhs = Rs. 550 lakhs. n3 (d) Amount due from/to customers - Contract costs + Recognised profits - Recognised losses - (Progress payments received + Progress payments to be received) - [605 + Nil - 100 - 400 + 140)] Rs.in lakhs - [605 - 100 - 540) Rs. in lakhs Amount due to customers = Rs 35 lakhs The amount of Rs. 35 lakhs will be shown in the balance sheet as liability (e) The relevant disclosures under AS 7 (Revised) are given below Contract revenue Contract expenses Recognised profits less recognized losses Progress billings (400+140) Retentions (billed but not received from contractee) Gross amount due to customers Rs.in lakhs 550 605 (100) 540 140 35 Q5. in preparing the financial statements of RLtd. for the year ended 31st March, 2009, you come across the following information. State with reasons, how you would deal with them in the financial statements : (a) An unquoted long term investment is carried in the books at a cost of Rs. 2 lakhs. The published accounts of the unlisted company received in May, 2009 showed that the company was incurring cash losses with declining market share and the long term investment may fetch more than Rs. 20,000. (b) The company invested 100 lakhs in April, 2009 in the acquisition of another company doing similar business, the negotiations for which had started during the financial year. (c) There was a major theft of stores valued at Rs. 10 lakhs in the preceding year which was detected only during current financial year (2008-09). As it is stated in the question that financial statements for the year ended 31st March, 2009 are under preparation, the views have been given on the basis that the financial statements are yet to be completed and approved by the Board of Directors