Chapter 8: Revenue Based Accounting Standards - Test 1: answer key

Question 1 · 2 marks · Chapter 8: Revenue Based Accounting Standards · medium

Scenario. Vardhan Infra Ltd. entered into a fixed price contract with Metro Rail Corporation on 1 April 2025 for construction of a 4-lane elevated corridor. The agreed contract price is ₹120 crore, and the project is expected to be completed by 31 March 2028. During FY 2025-26, the customer approved a variation for an additional ramp amounting to ₹8 crore. No claims or incentive payments arose. The company follows the percentage of completion method using the cost-to-cost basis. Costs incurred up to 31 March 2026 aggregate ₹32 crore. This includes ₹3 crore for standard materials stored at the site but not yet used in construction and ₹1.2 crore of general administration costs that are not reimbursable under the contract. Estimated future costs to complete the contract are ₹78 crore (excluding any non-reimbursable general administration costs). The work certified by the surveyor is 30%, but the company uses costs incurred for work performed as the measure of stage of completion. Progress billings of ₹25 crore have been raised. There is no uncertainty regarding collectability. You are required to answer the following.

What amount of contract revenue should Vardhan Infra Ltd. recognise for the year ended 31 March 2026?

1. ₹30.00 crore
2. ₹33.63 crore (correct answer)
3. ₹32.00 crore
4. ₹38.40 crore

Answer: B — ₹33.63 crore

Explanation. Total contract revenue is ₹120 crore + approved variation ₹8 crore = ₹128 crore. Contract cost incurred for work performed is ₹32 crore − ₹3 crore unused materials − ₹1.2 crore non-reimbursable general administration = ₹27.8 crore. Total estimated cost is ₹27.8 crore + ₹78 crore = ₹105.8 crore. Stage of completion is 27.8/105.8 = 26.28%. Revenue recognised is ₹128 crore × 26.28% = ₹33.63 crore.

Where it goes wrong. Using the surveyor-certified 30% or failing to exclude unused materials and non-reimbursable general administration from costs incurred.

Authority. AS 7 para 11; AS 7 para 30

Question 2 · 2 marks · Chapter 8: Revenue Based Accounting Standards · hard

What is the contract cost incurred for work performed up to 31 March 2026 for the purpose of the cost-to-cost method?

1. ₹27.80 crore (correct answer)
2. ₹32.00 crore
3. ₹30.80 crore
4. ₹28.80 crore

Answer: A — ₹27.80 crore

Explanation. Under AS 7, contract costs include direct costs, allocable costs and specifically chargeable costs, but exclude non-reimbursable general administration costs and costs relating to future activity such as unused materials stored at site. Therefore, contract cost for work performed = ₹32 crore − ₹3 crore − ₹1.2 crore = ₹27.8 crore. This amount is used as the numerator in the cost-to-cost method.

Where it goes wrong. Taking total costs incurred of ₹32 crore or deducting only one of the two excluded items.

Authority. AS 7 para 16; AS 7 para 30

Question 3 · 2 marks · Chapter 8: Revenue Based Accounting Standards · hard

What is the stage of completion of the contract as at 31 March 2026 under the cost-to-cost method?

1. 30.00%
2. 25.00%
3. 26.28% (correct answer)
4. 28.57%

Answer: C — 26.28%

Explanation. Stage of completion = contract costs incurred for work performed up to the reporting date ÷ estimated total contract costs. Contract cost incurred for work performed is ₹27.8 crore. Estimated total contract cost is ₹27.8 crore + ₹78 crore = ₹105.8 crore. Therefore, stage of completion = 27.8/105.8 × 100 = 26.28%. The surveyor-certified 30% is not used because the entity follows the cost-to-cost method.

Where it goes wrong. Using the work-certified 30% or computing 32/(32+78) = 29.09% by including unused materials.

Authority. AS 7 para 30

Question 4 · 2 marks · Chapter 8: Revenue Based Accounting Standards · hard

What is the profit to be recognised by Vardhan Infra Ltd. in the statement of profit and loss for FY 2025-26?

1. ₹5.83 crore (correct answer)
2. ₹6.20 crore
3. ₹4.80 crore
4. ₹8.00 crore

Answer: A — ₹5.83 crore

Explanation. Revenue recognised is ₹128 crore × 26.28% = ₹33.63 crore. Contract cost recognised as expense for work performed is ₹27.8 crore. Since the contract is expected to be profitable (total revenue ₹128 crore vs total cost ₹105.8 crore), the profit for the year is ₹33.63 crore − ₹27.8 crore = ₹5.83 crore. No foreseeable loss provision is required.

Where it goes wrong. Using 30% certified work to compute revenue (₹38.4 crore) and deducting ₹32 crore total costs, or recognising the entire expected profit.

Authority. AS 7 para 30; AS 7 para 35

Question 5 · 2 marks · Chapter 8: Revenue Based Accounting Standards · hard

Scenario. Orion Infra Ltd. signed a fixed price contract on 1 April 2025 with State Bridge Authority for construction of a cable-stayed bridge at an agreed price of ₹200 crore. The contract is expected to be completed by 31 March 2028. During FY 2025-26, the customer approved a variation of ₹10 crore for additional safety features. Orion lodged a claim of ₹4 crore for idle time caused by customer-caused delays; legal counsel advises that recovery is probable and the amount is reliably measurable. An incentive of ₹2 crore is available for early completion, but at the reporting date the contract is only 34% complete and the project has faced a labour dispute, making early completion not probable. No penalty is expected. Orion uses the cost-to-cost method. Costs incurred up to 31 March 2026 are ₹82 crore. This includes ₹4 crore of materials stored at site not yet used and ₹2 crore of general administration costs not reimbursable under the contract. Estimated future costs to complete are ₹145 crore (excluding non-reimbursable general administration). Progress billings are ₹70 crore. You are required to answer the following.

What amount of contract revenue should Orion Infra Ltd. recognise for the year ended 31 March 2026?

1. ₹70.00 crore
2. ₹76.00 crore
3. ₹73.59 crore (correct answer)
4. ₹80.00 crore

Answer: C — ₹73.59 crore

Explanation. Total contract revenue = initial ₹200 crore + approved variation ₹10 crore + probable and reliably measurable claim ₹4 crore = ₹214 crore. The early-completion incentive is excluded because early completion is not probable due to the labour dispute. Contract cost for work performed = ₹82 crore − ₹4 crore unused materials − ₹2 crore non-reimbursable administration = ₹76 crore. Estimated total cost = ₹76 crore + ₹145 crore = ₹221 crore. Stage = 76/221 = 34.39%. Revenue = ₹214 crore × 34.39% = ₹73.59 crore.

Where it goes wrong. Including the ₹2 crore incentive or excluding the ₹4 crore claim, and using total costs of ₹82 crore in the stage computation.

Authority. AS 7 para 11; AS 7 para 14; AS 7 para 30

Question 6 · 2 marks · Chapter 8: Revenue Based Accounting Standards · medium

What is the stage of completion of the Orion Infra Ltd. contract as at 31 March 2026?

1. 32.00%
2. 34.39% (correct answer)
3. 36.00%
4. 40.00%

Answer: B — 34.39%

Explanation. Contract cost incurred for work performed is ₹82 crore − ₹4 crore unused materials − ₹2 crore non-reimbursable general administration = ₹76 crore. Estimated total contract cost is ₹76 crore + ₹145 crore = ₹221 crore. Therefore, stage of completion = 76/221 × 100 = 34.39%. Unused materials and non-reimbursable administration do not represent work performed.

Where it goes wrong. Computing 82/(82+145) = 36.12% or using the 34% physical progress mentioned in the scenario.

Authority. AS 7 para 30

Question 7 · 2 marks · Chapter 8: Revenue Based Accounting Standards · medium

What is the amount of contract cost incurred for work performed up to 31 March 2026 for the Orion Infra Ltd. contract?

1. ₹82.00 crore
2. ₹80.00 crore
3. ₹78.00 crore
4. ₹76.00 crore (correct answer)

Answer: D — ₹76.00 crore

Explanation. Contract costs for work performed exclude costs relating to future activity and non-reimbursable general administration. Thus, ₹82 crore − ₹4 crore materials stored at site not yet used − ₹2 crore general administration not reimbursable = ₹76 crore. This is the contract cost recognised as expense under the percentage of completion method.

Where it goes wrong. Using the total ₹82 crore or deducting only the unused materials.

Authority. AS 7 para 16; AS 7 para 19

Question 8 · 2 marks · Chapter 8: Revenue Based Accounting Standards · hard

What amount should be recognised as provision for the foreseeable loss on the Orion Infra Ltd. contract as at 31 March 2026?

1. ₹4.59 crore (correct answer)
2. ₹7.00 crore
3. ₹2.41 crore
4. ₹5.00 crore

Answer: A — ₹4.59 crore

Explanation. Total expected loss = total estimated cost ₹221 crore − total contract revenue ₹214 crore = ₹7 crore. Loss already recognised to date = contract cost incurred ₹76 crore − revenue recognised ₹73.59 crore = ₹2.41 crore. Therefore, additional provision required = ₹7 crore − ₹2.41 crore = ₹4.59 crore. AS 7 requires the expected loss to be recognised immediately as an expense.

Where it goes wrong. Recognising the entire ₹7 crore as provision without adjusting the loss already recognised, or providing only ₹2.41 crore.

Authority. AS 7 para 35

Question 9 · 2 marks · Chapter 8: Revenue Based Accounting Standards · medium

Scenario. As per AS 7, which of the following is included in contract revenue?

As per AS 7, which of the following is included in contract revenue?

1. Penalty payable for late completion, when probable
2. Claim for extra work, when recovery is probable and amount is reliably measurable (correct answer)
3. Reimbursement of general administration costs not specified in the contract
4. Incentive payment that is not probable and cannot be measured reliably

Answer: B — Claim for extra work, when recovery is probable and amount is reliably measurable

Explanation. AS 7 para 11 states that contract revenue comprises the initial amount agreed in the contract plus variations, claims and incentive payments to the extent that they are probable and capable of reliable measurement. Claims are therefore included when recovery is probable and measurable. Penalties reduce revenue, and non-reimbursable general administration is excluded.

Where it goes wrong. Treating a penalty as revenue or including an incentive that is not probable and measurable.

Authority. AS 7 para 11

Question 10 · 2 marks · Chapter 8: Revenue Based Accounting Standards · hard

Scenario. A contractor has a fixed price contract of ₹50 lakh. Costs incurred to date are ₹18 lakh, which include ₹2 lakh materials stored at site not used and ₹1 lakh non-reimbursable general administration. Estimated future costs are ₹30 lakh. What is the stage of completion under the cost-to-cost method?

A contractor has a fixed price contract of ₹50 lakh. Costs incurred to date are ₹18 lakh, which include ₹2 lakh materials stored at site not used and ₹1 lakh non-reimbursable general administration. Estimated future costs are ₹30 lakh. What is the stage of completion under the cost-to-cost method?

1. 37.50%
2. 40.00%
3. 33.33% (correct answer)
4. 36.00%

Answer: C — 33.33%

Explanation. Contract cost incurred for work performed = ₹18 lakh − ₹2 lakh unused materials − ₹1 lakh non-reimbursable administration = ₹15 lakh. Estimated total contract cost = ₹15 lakh + ₹30 lakh = ₹45 lakh. Stage of completion = 15/45 × 100 = 33.33%. Costs relating to future activity and non-reimbursable general administration are not included in work performed.

Where it goes wrong. Computing 18/(18+30) = 37.5% or 18/45 = 40% by failing to exclude unused materials and non-reimbursable administration.

Authority. AS 7 para 30

Question 11 · 2 marks · Chapter 8: Revenue Based Accounting Standards · medium

Scenario. Which of the following costs is excluded from contract costs under AS 7?

Which of the following costs is excluded from contract costs under AS 7?

1. Site labour costs
2. Depreciation of plant used on the contract
3. Insurance costs allocable to the contract
4. General administration costs not reimbursable under the contract (correct answer)

Answer: D — General administration costs not reimbursable under the contract

Explanation. AS 7 includes direct costs, allocable costs and specifically chargeable costs in contract costs. General administration costs for which reimbursement is not specified in the contract are specifically excluded, as are selling costs and non-reimbursable research and development costs. Site labour and depreciation of contract plant are direct costs, and allocable insurance is included.

Where it goes wrong. Including all administrative overheads as contract costs merely because they are incurred for the project.

Authority. AS 7 para 16; AS 7 para 19

Question 12 · 2 marks · Chapter 8: Revenue Based Accounting Standards · hard

Scenario. A cost-plus contract allows reimbursement of allowable costs plus a 12% fee. During the year, allowable costs incurred are ₹60 lakh and non-allowable costs are ₹8 lakh. What amount should be recognised as contract revenue, assuming the costs incurred represent work performed and revenue is reliably measurable?

A cost-plus contract allows reimbursement of allowable costs plus a 12% fee. During the year, allowable costs incurred are ₹60 lakh and non-allowable costs are ₹8 lakh. What amount should be recognised as contract revenue, assuming the costs incurred represent work performed and revenue is reliably measurable?

1. ₹60.00 lakh
2. ₹67.20 lakh (correct answer)
3. ₹72.00 lakh
4. ₹68.00 lakh

Answer: B — ₹67.20 lakh

Explanation. Under a cost-plus contract, contract revenue comprises allowable costs plus the agreed fee. Revenue = ₹60 lakh allowable costs + 12% fee of ₹7.20 lakh = ₹67.20 lakh. Non-allowable costs of ₹8 lakh are expensed but are not reimbursable and do not form part of contract revenue. The fee is computed only on allowable costs, not on total costs.

Where it goes wrong. Adding non-allowable costs before applying the fee, or applying 12% to ₹68 lakh total costs.

Authority. AS 7 para 11; AS 7 para 16

Question 13 · 2 marks · Chapter 8: Revenue Based Accounting Standards · hard

Scenario. A fixed price contract has contract revenue of ₹100 lakh. Costs incurred to date are ₹45 lakh and estimated future costs are ₹65 lakh. The contract is loss-making. What amount should be recognised as provision for foreseeable loss at the reporting date under AS 7?

A fixed price contract has contract revenue of ₹100 lakh. Costs incurred to date are ₹45 lakh and estimated future costs are ₹65 lakh. The contract is loss-making. What amount should be recognised as provision for foreseeable loss at the reporting date under AS 7?

1. ₹10.00 lakh
2. ₹4.09 lakh
3. ₹5.91 lakh (correct answer)
4. ₹6.50 lakh

Answer: C — ₹5.91 lakh

Explanation. Total estimated cost = ₹45 lakh + ₹65 lakh = ₹110 lakh. Total expected loss = ₹110 lakh − ₹100 lakh = ₹10 lakh. Stage of completion = 45/110 = 40.91%. Revenue recognised = ₹40.91 lakh. Loss already recognised to date = cost incurred ₹45 lakh − revenue ₹40.91 lakh = ₹4.09 lakh. Additional provision = ₹10 lakh − ₹4.09 lakh = ₹5.91 lakh.

Where it goes wrong. Recognising the entire ₹10 lakh as provision immediately without adjusting the loss already recognised in the year.

Authority. AS 7 para 35

Question 14 · 2 marks · Chapter 8: Revenue Based Accounting Standards · medium

Scenario. When the outcome of a construction contract cannot be estimated reliably, AS 7 requires that:

When the outcome of a construction contract cannot be estimated reliably, AS 7 requires that:

1. Revenue is recognised only to the extent of contract costs incurred of which recovery is probable (correct answer)
2. No revenue is recognised until the contract is completed
3. Revenue is recognised using the percentage of completion method
4. Only the expected loss is recognised immediately

Answer: A — Revenue is recognised only to the extent of contract costs incurred of which recovery is probable

Explanation. AS 7 provides that when the outcome cannot be estimated reliably, revenue should be recognised only to the extent of contract costs incurred of which recovery is probable, and contract costs should be expensed in the period incurred. An expected loss must still be recognised immediately. The percentage of completion method is not applied until the uncertainties cease.

Where it goes wrong. Applying the percentage of completion method even when the final outcome cannot be reliably estimated.

Authority. AS 7 para 32; AS 7 para 35

Question 15 · 2 marks · Chapter 8: Revenue Based Accounting Standards · hard

Scenario. A contractor has a fixed price contract with an early completion incentive of ₹4 lakh. At the reporting date, the contract is 70% complete, but a labour dispute has arisen and early completion is not probable. The incentive is reliably measurable. How should the incentive be treated?

A contractor has a fixed price contract with an early completion incentive of ₹4 lakh. At the reporting date, the contract is 70% complete, but a labour dispute has arisen and early completion is not probable. The incentive is reliably measurable. How should the incentive be treated?

1. Include ₹4 lakh in contract revenue
2. Include ₹2 lakh in contract revenue
3. Include the incentive only when cash is received
4. Exclude the incentive from contract revenue (correct answer)

Answer: D — Exclude the incentive from contract revenue

Explanation. AS 7 states that incentive payments are included in contract revenue only when the contract is sufficiently advanced that it is probable that the specified performance standards will be met and the amount can be measured reliably. Since the labour dispute makes early completion not probable, the ₹4 lakh incentive is excluded despite the contract being 70% complete.

Where it goes wrong. Including the incentive because the contract is substantially complete or because the incentive is measurable.

Authority. AS 7 para 14

Question 16 · 2 marks · Chapter 8: Revenue Based Accounting Standards · medium

Scenario. Which of the following is an example of costs attributable to contract activity in general and allocable to specific contracts under AS 7?

Which of the following is an example of costs attributable to contract activity in general and allocable to specific contracts under AS 7?

1. General administration costs
2. Selling costs
3. Insurance costs (correct answer)
4. Research and development costs not reimbursable

Answer: C — Insurance costs

Explanation. AS 7 para 18 gives insurance as an example of costs attributable to contract activity in general that can be allocated to specific contracts, along with construction overheads and certain design and technical assistance. General administration, selling costs, and non-reimbursable research and development costs are specifically excluded from contract costs.

Where it goes wrong. Treating all indirect costs as excluded, or including general administration because it is allocable.

Authority. AS 7 para 18; AS 7 para 19

Question 17 · 2 marks · Chapter 8: Revenue Based Accounting Standards · hard

Scenario. A contractor has contract revenue of ₹120 lakh. Costs incurred to date are ₹50 lakh and estimated future costs are ₹80 lakh. What is the total expense to be recognised in the statement of profit and loss for the year under AS 7?

A contractor has contract revenue of ₹120 lakh. Costs incurred to date are ₹50 lakh and estimated future costs are ₹80 lakh. What is the total expense to be recognised in the statement of profit and loss for the year under AS 7?

1. ₹50.00 lakh
2. ₹56.15 lakh (correct answer)
3. ₹46.15 lakh
4. ₹60.00 lakh

Answer: B — ₹56.15 lakh

Explanation. Total estimated cost = ₹50 lakh + ₹80 lakh = ₹130 lakh. Expected loss = ₹130 lakh − ₹120 lakh = ₹10 lakh. Stage of completion = 50/130 = 38.46%. Revenue recognised = ₹120 lakh × 38.46% = ₹46.15 lakh. Loss already recognised = ₹50 lakh − ₹46.15 lakh = ₹3.85 lakh. Provision required = ₹10 lakh − ₹3.85 lakh = ₹6.15 lakh. Total expense = ₹50 lakh + ₹6.15 lakh = ₹56.15 lakh.

Where it goes wrong. Recognising only the cost incurred of ₹50 lakh, or expensing the full expected loss of ₹60 lakh without matching revenue.

Authority. AS 7 para 30; AS 7 para 35

Question 18 · 2 marks · Chapter 8: Revenue Based Accounting Standards · medium

Scenario. Which of the following is NOT an appropriate method for determining the stage of completion under AS 7?

Which of the following is NOT an appropriate method for determining the stage of completion under AS 7?

1. Proportion of contract costs incurred for work performed to estimated total contract costs
2. Surveys of work performed
3. Completion of a physical proportion of contract work
4. Progress payments received from customers (correct answer)

Answer: D — Progress payments received from customers

Explanation. AS 7 permits the stage of completion to be determined using the proportion of contract costs incurred for work performed to estimated total costs, surveys of work performed, or completion of a physical proportion of the contract work. Progress payments and advances received from customers may not reflect the work performed and are therefore not an appropriate measure.

Where it goes wrong. Using progress billings or cash received as a measure of work done.

Authority. AS 7 para 30

Question 19 · 2 marks · Chapter 8: Revenue Based Accounting Standards · hard

Scenario. A customer has requested a variation in a construction contract. Negotiations are ongoing, and the contractor believes approval is probable but the amount cannot be reliably measured yet. How should the variation be treated in contract revenue?

A customer has requested a variation in a construction contract. Negotiations are ongoing, and the contractor believes approval is probable but the amount cannot be reliably measured yet. How should the variation be treated in contract revenue?

1. Exclude the variation until it is reliably measurable (correct answer)
2. Include the full estimated variation amount
3. Include 50% of the variation as a prudent measure
4. Include the variation because approval is probable

Answer: A — Exclude the variation until it is reliably measurable

Explanation. AS 7 includes variations in contract revenue only to the extent that it is probable that they will result in revenue and they are capable of being reliably measured. If negotiations are ongoing and the amount cannot be reliably measured, the variation is excluded until both conditions are satisfied. Probability alone is not sufficient.

Where it goes wrong. Including the variation because approval is probable, or recognising a prudent 50% without reliable measurement.

Authority. AS 7 para 11; AS 7 para 12

Question 20 · 2 marks · Chapter 8: Revenue Based Accounting Standards · hard

Scenario. How should borrowing costs relating to a construction contract be treated under AS 7 read with AS 16?

How should borrowing costs relating to a construction contract be treated under AS 7 read with AS 16?

1. Excluded from contract costs
2. Included only for cost-plus contracts
3. Included only for fixed price contracts
4. Included as allocable contract costs if directly attributable to the contract (correct answer)

Answer: D — Included as allocable contract costs if directly attributable to the contract

Explanation. AS 7 allows costs attributable to contract activity in general and allocable to the contract to be included in contract costs. Borrowing costs that are directly attributable to the construction of a qualifying asset are capitalised as part of the cost of that asset under AS 16 and are therefore allocable contract costs. They are not restricted to cost-plus or fixed price contracts.

Where it goes wrong. Excluding all finance costs from contract costs, or including them only for cost-plus contracts.

Authority. AS 7 para 18; AS 16