Practical Questions on Accounting Standard 9 : Revenue Recognition

For better understanding of AS -9 Revenue recognition, it is advised to go through these practical question answers. These selective questions and answers for accounting standard definitely going to help you for better grasp AS-9 fundamentals.

1. Arjun Ltd. sold farm equipments through its dealers. One of the conditions at the time of sale is, payment of consideration in 14 days and in the event of delay interest is chargeable @ 15% per annum. The Company has not realized interest from the dealers in the past. However, for the year ended 31.3.2006, it wants to recognise interest due on the balances due from dealers. The amount is ascertained at Rs. 9 lakhs. Decide whether the income by way of interest from dealers is eligible for recognition as per AS 9.

Answer :
As per AS 9 “Revenue Recognition”, where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, the revenue recognition is postponed to the extent of uncertainty inverted. In such cases, the revenue is recognized only when it is reasonably certain that the ultimate collection will be made.
In this case, the company never realized interest for the delayed payments make by the dealers. Hence, it has to recognize the interest only if the ultimate collection is certain. The interest income hence is not to be recognized.

2. Y Ltd. used certain resources of X Ltd. In return X Ltd. receives Rs. 10 lakhs and Rs. 15 lakhs as interest and royalties respectively, from Y Ltd. during the year 2007 –2008. State on what basis X Ltd. should recognize their revenue, as per AS 9.

Answer :

As per AS 9 on ‘Revenue Recognition’, interest of Rs.10 lakhs received in the year 2007-2008 should be recognized on the time basis, whereas royalty of Rs. 15 lakhs received in the same year should be recognized on accrual basis as per the terms of relevant agreement.

3. According to Accounting Standard 9, when revenue from sales should be recognised?

Answer :

As per para 11 of AS 9 ‘Revenue Recognition’, revenue from sales should be recognized only when requirements as to performance are satisfied provided that at the time of performance it is not unreasonable to expect ultimate collection. These requirements can be given as follows:
  • 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.

4. M/s. Sea Ltd. recognized Rs. 5.00 lakhs, on accrual basis, income from dividend during the year 2010-11, on shares of the face value of Rs. 25.00 lakhs held by it in Rock Ltd. as at 31st March, 2011. Rock Ltd. proposed dividend @ 20% on 10th April, 2011. However, dividend was declared on 30th June, 2011. Please state with reference to relevant Accounting Standard, whether the treatment accorded by Sea Ltd. is in order.

Answer :

Para 8.4 of AS 9 “Revenue Recognition” states that dividend from investments in shares are not recognized in the statement of Profit and Loss until the right to receive dividend is established.
In the given case, the dividend is proposed on 10th April, 2011, while it was declared on 30th June, 2011. Hence, the right to receive dividend is established on 30th June, 2011 only. Therefore, on applying the provisions stated in the standard, income from dividend on shares should be recognized by Sea Ltd. in the financial year 2011-2012 only. Therefore, the recognition of income from dividend of Rs. 5 lakhs, on accrual basis, in the financial year 2010-11 is not in accordance with AS 9.

5. M/s. Moon Ltd. sold goods worth Rs. 6,50,000 to Mr. Star. Mr. Star asked for a trade discount amounting to Rs. 53,000 and same was agreed to by M/s. Moon Ltd. The sale was effected and goods were dispatched. On receipt of goods, Mr. Star has found that goods worth Rs. 67,000 are defective. Mr. Star returned defective goods to M/s. Moon Ltd. And made payment due amounting to Rs. 5,30,000. The accountant of M/s. Moon Ltd. Booked the sale for Rs. 5,30,000. Discuss the contention of the accountant with reference to Accounting Standard (AS) 9.

Answer :

As per AS 9 ‘Revenue Recognition’, revenue is the gross inflow of cash, receivable or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods. However, trade discounts and volume rebates given in the ordinary course of business should be deducted in determining revenue. Revenue from sales should be recognized at the time of transfer of significant risks and rewards. If the delivery of the sales is not subject to approval from customers, then the transfer of significant risks and rewards would take place when the sale is affected and goods are dispatched. In the given case, if trade discounts allowed by M/s. Moon Ltd. are given in the ordinary course of business, M/s. Moon Ltd. should record the sales at Rs. 5,97,000 (i.e. Rs. 6,50,000 – Rs. 53,000) and goods returned worth Rs. 67,000 are to be recorded in the form of sales return. However, when trade discount allowed by M/S. Moon Ltd. is not in the ordinary course of business, M/s. Moon Ltd. should record the sales at gross value of Rs. 6,50,000. Discount of Rs. 53,000 in price and return of goods worth Rs. 67,000 are to be adjusted by suitable provisions. M/s Moon Ltd. might have sent the credit note of Rs. 1,20,000 to Mr. Star to account for these adjustments. In both the cases, the contention of the accountant to book the sales for Rs. 5,30,000 is not correct.

6. The Board of Directors of X Ltd. decided on 31.3.2011 to increase sale price of certain items of goods sold retrospectively from 1st January, 2011. As a result of this decision the company has to receive ` 5 lakhs from its customers in respect of sales made from 1.1.2011 to 31.3.2011. But the Company’s Accountant was reluctant to make-up his mind. You are asked to offer your suggestion.

Answer :

As per para 10 of AS 9 ‘Revenue Recognition’, the additional revenue on account of increase in sales price with retrospective effect, as decided by Board of Directors of X Ltd., of ` 5 lakhs to be recognised as income for financial year 2010-11, only if the company is able to assess the ultimate collection with reasonable certainty. If at the time of raising of any claim it is unreasonable to expect ultimate collection, revenue recognition should be postponed.

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