Contract Accounting: Practical Problems and Solutions

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on April 11, 2023

Problem 1

A company's contract ledger shows the following details in respect of Contract No. 50, which commenced on 1 April 2019.

Problem 1 Data

The contract was completed by 31 March 2020 at a contract price of $200,000.

The values of the materials and plant returned to store on 31 March 2020 were $6,000 and $12,000, respectively. The contract price was received in full on 31 March 2020.

Required: Prepare a contract account and contractee's personal account.

Solution

Contract Accounting Problem 1 Solution
Contractee's Account Problem 1 Solution

Problem 2

The following is the summarized record as on 31 March 2019 relating to Contract No. 414 completed during the year.

Problem 2 Data

Required: Prepare the contract account from the above particulars.

Solution

Contract Account Problem 2 Solution

Problem 3

How to find the tender price from a contractee's account

From the following particulars, write up the Contract No. 5 Account and find the value of the tender (contracted) price.

Problem 3 Data

Provide 60% on productive wages for works overheads and 12.5% on works cost for office overhead. Profit to be realized is 15% on the tender price.

Solution

Contract Account Problem 3 Solution

Problem 4

Work in Progress Account

On 1 April 2019, Contractors Ltd. started building a cinema hall at a contract price of $600,000. During the year ended 31 March 2020, they incurred the following expenses:

Problem 4 Data

Work to the value of $120,000 had been certified on 31 March 2020, of which 75% had been received in cash.

The cost of work completed but not certified was $10,500. Materials valued at $5,000 were on hand at site.

Required: After allowing for depreciation @ 20% p.a. on plant, prepare an account showing the profit earned to date and the amount of profit in the company's accounts on 31 March 2020. Also, prepare a work in progress account.

Solution

Contract Account Problem 4 Solution
Work In Progress Account Problem 4 Solution

Note: Since the value of work certified ($120,000) was less than one-quarter of the total contract price, the entire notional profit of $28,500 has been kept as a reserve for contingencies.

Incomplete Contracts: When work certified is 1/4 (or more than 1/4) of the contract price but less than 1/2 of the contract price.

Problem 5

The following particulars relate to a contract undertaken by a firm of contractors:

Problem 5 Data

The contract price was agreed at $250,000. Cash received from contractee was $180,000.

Required: You are required to prepare a contract account, contractee's account, and show suitable items in the balance sheet of the contractors as on 31 March.

Solution

Contract Account Problem 5 Solution
Work In Progress Account Problem 5 Solution
Balance Sheet Problem 5 Solution


Contract Accounting: Practical Problems and Solutions FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.