Question 1 (c)
Revenue on a sale with an agreement to repurchase (AS 9)
3 marks
- Time to write
- About 6 minutes
From an older CBCS paper
Question
Question 1 (c) · 3 marksP Ltd. agreed with Q Ltd. to sell goods costing ₹ 3,00,000 at a profit of 20 % on sale, and the sale took place on 1st February, 2021. The same day, P Ltd. made a further agreement with Q Ltd. to repurchase the same goods at ₹ 4,20,000 on 1st August, 2021. The predetermined repurchasing price includes, inter alia, Q Ltd.'s holding cost. As per AS - 9, calculate the amount of revenue for P Ltd.'s financial statements for the year 2020–2021. [3 Marks]
Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
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- calculateFormula first, then the working, then the answer with its unit (₹, %, units).
Write it in this order
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- 1 AS 9 treatment of a sale and repurchase agreement 1½ marks 3 min
- 2 Revenue nil, with the finance cost 1½ marks 3 min
Try it first. About 6 minutes for 3 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
Principle. Under AS 9, where the seller concurrently agrees to repurchase the same goods at a later date, a transaction that is in substance a financing arrangement does not give rise to revenue: the cash received is not revenue and is not recognised as such.
Here P Ltd. sells the goods and on the same day agrees to buy them back at a predetermined price that covers Q Ltd.'s holding cost; the risks and rewards of the goods never really leave P Ltd., whereas a sale of goods is recognised only when the seller has transferred the significant risks and rewards of ownership and keeps no effective control. It is a loan secured on the goods.
| Particulars | ₹ |
|---|---|
| Sale price (3,00,000 ÷ 80%, a profit of 20% on sale) | 3,75,000 |
| Repurchase price on 1 August 2021 | 4,20,000 |
| Finance cost for six months | 45,000 |
| Finance cost for 2020-21 (February and March: 45,000 × 2/6) | 15,000 |
Revenue for 2020-21: Nil. The ₹3,75,000 received is shown as a liability (a borrowing); the goods stay in P Ltd.'s inventory at cost (₹3,00,000); and ₹15,000 of the finance cost is charged in 2020-21, the rest in 2021-22.
Where the 3 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | AS 9 treatment of a sale and repurchase agreement | 1.5 |
| 2 | Revenue nil, with the finance cost | 1.5 |
| Total | 3 |
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