Question

When the completion stage of the contract is more than half, the profit to be credited to Profit and Loss account will be equal to ___________.

• A. $\frac{1}{3}rd$ of Notional Profit $\times \frac{\text{Cash received}}{\text{Work certified}}$
• B. $\frac{1}{2}$ of Notional Profit $\times \frac{\text{Cash received}}{\text{Work certified}}$
• C. $\frac{2}{3}rd$ of Notional Profit $\times \frac{\text{Cash received}}{\text{Work certified}}$
• D. Full Notional Profit

Answer 1

Answer: (C)

$\frac{2}{3}rd$ of Notional Profit $\times \frac{\text{Cash received}}{\text{Work certified}}$

In contract costing, there will be no difficulty in dealing with the profit if the contract is completed in the same financial year. In case of incomplete contract it is not advisable to to transferred the complete profit to profit & loss account as there may be chances of increase in the cost of raw material or labor in the next year. Hence a contingencies need to be created.

If the contract is completed more than half, 2/3rd of notional profit in proportion to cash received and work certified will be transferred to profit & loss account.