Question 2 (a)

Revenue recognition under AS 9: four cases

8 marks

Time to write
About 16 minutes
Topic
Revenue recognition and AS 9
Notes
Crux notes

Question

Question 2 (a) · 8 marks

In each case, indicate how much revenue can be recognised as per AS 9 and the date on which the revenue is recognised.

  1. Vaidehi Textiles Ltd. sold goods on credit to Karan Exports Ltd. For Rs. 300 crores on 8th Nov. 2022. Karan Exports Ltd was planning to export these goods, but in Dec. 2022 their export order was cancelled. On 10th January 2023 they Ltd. decided to sell these same goods in the local market. Vaidehi Textiles Ltd. was asked to offer a price discount of 15 %, but agreed to give them a discount of 10%. The directors of Vaidehi Textiles Ltd. want the sales figure adjusted to the extent of the discount given to Karan Exports Ltd. Comment.

  2. On 21-3-2023 clothes worth 72,000 were sold to Meher Home Store but, at their request, because refurbishing of their showroom was underway, delivery of the clothes was made on 12-4 2023.

  3. On 15th January, 2022 garments valued at 4,80,000 were sent to Prateek on consignment basis, of which 25% garments were lying unsold with Prateek as on 31st March, 2022.

  4. On 1st November, 2021 garments valued at 3,00,000 were sold on approval basis. The approval period was 4 months, after which they were considered sold. Approval for 75% goods was sent by the buyer up to 31st December, 2021, while for the remaining goods no approval or disapproval was received till 31st March, 2022. (2×4)

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

16 minfor 8 marks

Read from the question

  • (i)–(iv)4 items, each marked on its own: give each its share.
  • how muchFormula first, then the working, then the answer with its unit (₹, %, units).

What the paper leaves open

  1. "They Ltd." in case (i) is read as Karan Exports Ltd.
  2. In case (i) the discount was agreed after the sale and arose from the buyer's own difficulty, so it is read as a separate charge of the year, not a reduction of sales already recognised.
  3. In case (iii) the 25% is read as still unsold with the consignee at 31st March 2022.
  4. In case (iv) the four-month approval period runs from 1st November 2021, so it expires before 31st March 2022.

Write it in this order

  1. Read the data; note exactly what is asked 1 min
  2. 1 (i) Discount after the sale: turnover stands crores 2 marks 4 min
  3. 2 (ii) Delivery deferred at the buyer's request recognised on 21st March 2023 2 marks 4 min
  4. 3 (iii) Consignment revenue, still inventory 2 marks 3 min
  5. 4 (iv) Sale on approval: the whole, the period expiring 1st March 2022 2 marks 3 min
  6. Check: arithmetic, units (₹, %), final answer underlined 1 min

Try it first. About 16 minutes for 8 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.

(i) The discount does not reduce the recorded sales: ₹300 crores stands, recognised on 8th Nov. 2022

Revenue was properly recognised on 8th November 2022, when the goods were sold on credit: AS 9 recognises sales revenue when the performance requirements are met, provided ultimate collection is reasonably expected at that time (para 10).

The concession agreed after 10th January 2023 did not arise from anything defective in that sale; it arose from the buyer's own difficulty, a cancelled export order. AS 9 deals with an uncertainty that arises after the sale by a separate provision rather than by adjusting the revenue originally recorded (para 9.3); the same reasoning applies to a concession agreed after the sale.

So the discount of ₹30 crores (10% of ₹300 crores, not the 15% or ₹45 crores asked for) is charged to the Profit & Loss Account as an expense of the year. The directors' proposal is not acceptable. Netting the discount off would report turnover of ₹270 crores instead of ₹300 crores; profit is the same either way, but turnover would be understated by ₹30 crores.

(ii) ₹72,000 is revenue of the year ended 31 March 2023, recognised on 21-3-2023

The sale was made on 21st March 2023, within the year. Delivery was deferred at the buyer's request while its showroom was being refurbished, not because the seller had anything left to do. The goods were identified and held to the buyer's order, so the property and the significant risks and rewards had passed and the seller kept no effective control of the goods. AS 9's illustration for delivery delayed at the buyer's request recognises revenue although physical delivery is not complete, provided the goods are on hand, identified and ready for delivery. Revenue ₹72,000 is recognised on 21st March 2023, although delivery took place on 12th April 2023.

(iii) Revenue only on the 75% sold on: ₹3,60,000

Goods sent on consignment are not a sale. The consignee holds them as agent; property and the significant risks and rewards stay with the consignor until the consignee sells them to a third party. Of the ₹4,80,000 sent, 25% (₹1,20,000) was still unsold with Prateek on 31st March 2022.

Goods sent on consignment₹
Sold on by the consignee: revenue recognised as the consignee sells3,60,000
Still unsold with the consignee: the consignor's inventory1,20,000
Sent4,80,000

(iv) The whole ₹3,00,000 is revenue of the year ended 31 March 2022

Under AS 9's illustration for sales on approval, revenue is not recognised until the buyer formally accepts the goods, adopts the transaction, or the time for rejection has elapsed: so revenue arises on acceptance or on expiry of the approval period, whichever is earlier.

  • 75% (₹2,25,000) was approved by 31st December 2021: revenue by that date.
  • The approval period on the remaining 25% (₹75,000) ran four months from 1st November 2021 and so expired on 1st March 2022, before the year end. Silence past expiry is deemed acceptance, so ₹75,000 is revenue on 1st March 2022.
Goods sent on approval₹
Approved by 31st December 2021 (75%)2,25,000
Approval period expired 1st March 2022 (25%): deemed accepted75,000
Revenue recognised in the year ended 31 March 20223,00,000

Had the approval period run past 31st March 2022, the ₹75,000 would have stayed in inventory.

Where the 8 marks sit

#CaseMarks
1(i) Discount after the sale: turnover stands at ₹300 crores2
2(ii) Delivery deferred at the buyer's request: ₹72,000 recognised on 21st March 20232
3(iii) Consignment: ₹3,60,000 revenue, ₹1,20,000 still inventory2
4(iv) Sale on approval: the whole ₹3,00,000, the period expiring 1st March 20222
Total8
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