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(a) Cost incurred till 31 March, 2006 Prudent estimate of additional cost for completion Total cost of construction Less: Contract price Total foreseeable loss Rs.
(a) Cost incurred till 31 March, 2006 Prudent estimate of additional cost for completion Total cost of construction Less: Contract price Total foreseeable loss Rs. 64,99,000 32 01.000 97,00,000 85.00.000 12,00.000 c7 According to para 35 of AS 7 (Revised 2002), the amount of Rs. 12,00,000 is required to be recognized as an expense. Rs. 64,99,000 X 100 Contract work in progress - = 67% 97,00,000 Proportion of total contract value recognized as turnover as per para 21 of AS 7 (Revised) on Construction Contracts = 67% of Rs.85,00,000 = Rs.56,95,000 (b) As per paras 8.2 and 13 of Accounting Standard 4 on Contingencies and Events Occurring after the Balance Sheet Date, Assets and Liabilities should be adjusted for events occurring after the balance sheet date that provide additional evidence to assist estimation of amounts relating to conditions existing at the balance sheet date. So full provision for bad debt amounting to Rs. 2 lakhs should be made to cover the loss arising due to the insolvency in the Final Accounts for the year ended 31 March, 2006. It is because earthquake took place before the balance sheet date. Had the earthquake taken place after 314 March, 2006, then mere disclosure required as per para 15, would have been sufficient. Illustration 11 At the end of the financial year ending on 31st December, 2003, a company finds that there are twenty law suits outstanding which have not been settled till the date of approval of accounts by the Board of Directors. The possible outcome as estimated by the Board is as follows: Probability Loss (Rs.) In respect of five cases (Win) 100% Next ten cases (Win) 60% Lose (Low damages) 30% 1,20,000 Lose (High damages) 10% 2,00,000 Remaining five cases Win 50% Lose (Low damages) 30% 1,00,000 Lose (High damages) 20% 2,10,000 Outcome of each case is to be taken as a separate entity. Ascertain the amount of contingent loss and the accounting treatment in respect thereof
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