Answer Key
-MCQ:
1):
1. (b)
2. (a)
3. (b)
4. (b)
2). (a)
3). (c)
Descriptive:
1.
(i) Delivery is delayed at buyer’s request and buyer takes title and accepts
billing: Revenue should be recognized notwithstanding that physical
delivery has not been completed so long as there is every expectation that
delivery will be made. However, the item must be on hand, identified and ready for
delivery to the buyer at the time the sale is recognized rather than there
being simply an intention to acquire or manufacture the goods in time for
delivery.
(i) Instalment sales: When the consideration is receivable in instalments, revenue
attributable to the sales price exclusive of interest should be recognized at the
date of sale. The interest element should be recognized as revenue,
proportionately to the unpaid balance due to the seller.
(ii) Trade discounts and volume rebates: Trade discounts and volume rebates
received are not encompassed within the definition of revenue, since they
represent a reduction of cost. Trade discounts and volume rebates given should
be deducted in determining revenue.
(iii) Insurance agency commissions for rendering services: Insurance agency
commissions should be recognized on the effective commencement or renewal
dates of the related policies.
(iv) Advertising commission: Revenue should be recognized when the service is
completed. For advertising agencies, media commissions will normally be
recognized when the related advertisement or commercial appears before the
public and the necessary intimation is received by the agency, as opposed to
production commission, which will be recognized when the project is completed.
2(a). AS 9 on ‘Revenue Recognition’ states that revenue is recognised
when it is earned and there is reasonable certainty of its collection,
arising from the ordinary activities of an enterprise.
In this case, Class Ltd. is in the business of buying and selling properties.
The land purchased and sold forms part of its inventory. The sale of land
at ` 360 crore is a transaction arising from ordinary activities of the
company. Therefore, the revenue is recognised when the sale is
completed and collection is reasonably certain.
In the light of AS 5, this transaction will not be treated as an
extraordinary item, because it arises from the ordinary course of
business. However, if the amount is of such size, nature, or incidence
that its disclosure is relevant to explain the performance of the
enterprise, the nature and amount of such items should be disclosed
separately.
Hence, ` 360 crore realised from the sale of land shall be recognised as
revenue in the year in which the sale is completed.
Q-2(b). The Accounting Standard Board of lCAl has come up with an
announcement in the earlier years wherein it clarified that the inter-
divisional transfers/sales are not revenue as per AS 9 "Revenue
Recognition”. According to it, in case of inter-divisional transfers, risks
and rewards remain within the enterprise and also there is no
consideration from the point of view of the enterprise as a whole.
Therefore, the recognition criteria for revenue recognition are also not
fulfilled in respect of inter-divisional transfers. Hence, no revenue is
recognized in the case of inter-divisional transfers.
Q-3(a). As per AS 9 on Revenue Recognition, revenue arising from the
use by others of enterprise resources yielding interest and royalties should
only be recognized when no significant uncertainty as to measurability or
collectability exists. These revenues are recognized on the following bases:
(i) Interest: on a time proportion basis taking into account the amount
outstanding and the rate applicable. Therefore X Ltd. should
recognize interest revenue of ` 10 Lakhs.
(ii) Royalties: on an accrual basis in accordance with the terms of the
relevant agreement. X Ltd. therefore should recognize royalty
revenue of ` 15 Lakhs.
Q-3(b). As per AS 9 “Revenue Recognition”, in a transaction involving
the sale of goods, performance should be regarded as being achieved
when the following conditions are fulfilled:
(i) the seller of goods has transferred to the buyer the property in the
goods for a price or all significant risks and rewards of ownership
have been transferred to the buyer and the seller retains no
effective control of the goods transferred to a degree usually
associated with ownership; and
(ii) no significant uncertainty exists regarding the amount of the
consideration that will be derived from the sale of the goods.
Case (i): The sale is complete but delivery has been
postponed at buyer’s request. B.S. Ltd. should
recognize the entire sale of ` 50,000 for the year ended
31st March, 2024.
Case (ii): In case of consignment sale revenue should not
be recognized until the goods are sold to a third
party.20% goods lying unsold with consignee should be
treated as closing inventory and sales should be
recognized for ` 1,00,000 (80% of ` 1,25,000).
Case (iii): In case of goods sold on approval basis, revenue
should not be recognized until the goods have been
formally accepted by the buyer or the buyer has done an act
adopting the transaction or the time period for rejection
has elapsed or where no time has been fixed, a
reasonable time has elapsed. Therefore, revenue should
be recognized for the total sales amounting ` 1,00,000 as
the time period for rejecting the goods had expired.
Thus, total revenue amounting ` 2,50,000 (50,000 +
1,00,000 + 1,00,000) will be recognized for the year
ended 31st March, 2024 in the books of
B.S. Ltd.
Q-4(a). As per AS 9 “Revenue Recognition”, in a transaction involving the
sale of goods, performance should be regarded as being achieved when the
following conditions are fulfilled:
(i) the seller of goods has transferred to the buyer the property in the
goods for a price or all significant risks and rewards of ownership have
been transferred to the buyer and the seller retains no effective control
of the goods transferred to a degree usually associated with ownership;
and no significant uncertainty exists regarding the amount of the
consideration that will be derived from the sale of the goods.
Trade discounts given should be deducted in determining revenue. Thus
12% should be deducted from the amount of turnover for the purpose of
recognition of revenue.
The adjustment of sale figure to the extent of discount is correct as per AS 9
'Revenue Recognition'.
(ii) Dividends from investments in securities are not recognized in the
statement of profit and loss until a right to receive payment is
established. In the given situation, the dividend is proposed on
30th March, 2025, while it is declared on 30 th April, 2025. Thus, the right
to receive the payment of dividend gets established on 30th April, 2025.
The recognition of ` 10 lakhs on accrual basis in the end of the financial year
31st March, 2025 is not correct as per AS 9 ‘Revenue Recognition’.
(iii) In case of goods sold on approval basis, revenue should not be
recognized until the goods have been formally accepted by the buyer
or the buyer has done an act adopting the transaction or the time
period for rejection has elapsed or where no time has been fixed, a
reasonable time has elapsed.
Therefore, revenue should be recognized for the ` 90,000 upon receipt of
approval on 31st January, 2025 and for the balance ` 60,000 on
(iv) In case of goods sold on approval basis, revenue should not be
recognized until the goods have been formally accepted by the buyer
or the buyer has done an act adopting the transaction or the time
period for rejection has elapsed or where no time has been fixed, a
reasonable time has elapsed.
Therefore, revenue should be recognized for the ` 90,000 upon receipt of approval on 31st
January, 2025 and for the balance ` 60,000 . 15th March, 2025 as the time period for
rejecting the goods had expired.
20,000 goods lying unsold with consignee should be treated as closing
inventory and sales should be recognized for ` 60,000. In case of
consignment sale revenue should not be recognized until the goods
are sold to a third party.
The recognition of ` 60,000 revenues in the book for the year 2024-25 is
correct as per AS 9 ‘Revenue Recognition’.
Q-4(b). In the given case, Mithya Ltd. concurrently agreed to
repurchase the same goods from Satya Ltd. on 1st February, 2024. Also
the re-selling price is pre-determined and covers purchasing and
holding costs of Satya Ltd. Hence, the transaction between Mithya Ltd.
and Satya Ltd. on 1st February, 2024 should be accounted for as financing
rather than sale. The resulting cash flow of ` 9.60 lakh received by Mithya
Ltd., cannot be considered as revenue as per AS 9 “Revenue
Recognition”.
Journal Entries in the books of Mithya Ltd.
` in
lakh
1.2.2024 Bank Account Dr. 9.60
To Advance from Satya Ltd. 9.60
(Being advance received from
Satya Ltd. amounting [` 8
lakh + 20% of ` 8 lakh = 9.60
lakh] under sale and re-
purchase agreement)
Financing Charges Account To 0.40
31.3.202 Satya Ltd. Dr. 0.40
4 (Financing charges for 2
months [(10.80 – 9.60) x 2/6]
Profit and Loss Account
0.40
To Financing Charges Account
(Being amount of finance Dr. 0.40
31.3.202 charges transferred to P& L
4 Account)