Question 4

Build well contracts Limited under took a contract for Rs. 10,00,000 on 1st April 2019. On 31st March 2020 when the accounts were closed, the following details about the contract were gathered:

The contract contained an escalation clause which read as follows :

“In the event of increase of prices of materials and rates of wages by more than 5%, the contract price would be increased accordingly by 25% of the rise of the cost of materials and wages beyond 5% in each case”

It was found that since the date of signing the contract agreement, the prices of materials and wages increased by 25%. The value of work certified does not take into account the effect of the above clause.

Prepare the Contract Account.