CA Inter Adv Accounting

Answer: (b)

Under AS 9 – Revenue Recognition (notified under the Companies (Accounting Standards) Rules, 2006), revenue from sale of goods should be recognised when all of the following conditions are satisfied: (i) the seller has transferred the property in goods or all significant risks and rewards of ownership have passed to the buyer; (ii) the seller retains no effective control over the goods; (iii) no significant uncertainty exists as to the amount of consideration; and (iv) it is not unreasonable to expect ultimate collection.

Timing of revenue recognition in the given case:

In the present case, the contract between RTS Ltd and Indian Railways stipulates that the components must undergo physical inspection at RTS's factory by Railways' representatives before dispatch. The Railways' acceptance is evidenced by a hologram sticker affixed to each component post-inspection. This inspection is not a mere administrative procedure — it is a contractual condition of acceptance. Until the hologram sticker is applied, Indian Railways has not formally accepted the goods, and the significant risks and rewards of ownership have not passed to the buyer.

Accordingly, revenue should be recognised on completion of the inspection of the components (i.e., when Railways' representatives complete the quality check and affix the hologram sticker), and not merely on dispatch. Dispatch follows inspection and is triggered by the completed inspection; raising the invoice on dispatch is a billing practice and does not determine the revenue recognition timing under AS 9.

Note that the delivery terms being ex-works means risk of loss technically arises at the factory gate; however, this is secondary to the condition of acceptance-by-inspection imposed by the contract. The hologram sticker marks the moment of contractual acceptance and effective transfer of risks and rewards.

Would the answer change if inspection is normally known to lead to no quality rejections?

The assessment would not change. Even if, as a matter of historical practice, inspection leads to no quality rejections, the fact remains that (a) the inspection is a formal contractual condition — not an optional formality waived by the parties — and (b) Railways' representatives are physically required to visit, inspect, and affix the hologram sticker before the goods can be dispatched. The inspection still occurs and must still be completed before goods leave the factory. Therefore, the trigger for revenue recognition remains the completion of inspection, regardless of the statistical probability of rejection. An event that has not yet occurred (inspection completion) cannot be bypassed for revenue recognition purposes merely because its outcome is predictable.

Answer: (d) ₹49,47,368

As per AS 2 — Valuation of Inventories (notified under the Companies (Accounting Standards) Rules, 2006), the cost of inventories should include all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition.

Regarding waste in a production process, AS 2 distinguishes between normal waste and abnormal waste:

- Normal waste: Unavoidable and inherent to the production process. Its cost is absorbed into the cost of good output by spreading the total input cost over the expected (normal) output.
- Abnormal waste: Arises due to inefficiencies or accidents beyond the normal expected level. It is not included in the cost of inventories and is instead written off to the Statement of Profit and Loss as a period cost.

Applying these principles to A Ltd:

Normal waste = 5% of 5,000 MT input = 250 MT

Actual waste = 300 MT

Abnormal waste = 300 MT − 250 MT = 50 MT → Written off; not included in inventory valuation.

The total input cost of ₹50,00,000 is spread over the normal output (i.e., input minus normal waste) = 5,000 − 250 = 4,750 MT.

Cost per MT of good output = ₹50,00,000 ÷ 4,750 MT = ₹1,052.6316 per MT

Actual good output in stock = 5,000 − 300 = 4,700 MT

Value of inventory (good output) = 4,700 MT × ₹1,052.6316 = ₹49,47,368

The 250 MT of normal waste lying in stock has nil cost assigned to it separately (its cost has already been absorbed into the good output cost per MT). The 50 MT of abnormal waste is expensed, not inventorised. Therefore, the total value of inventory to be recorded in the books of A Ltd is ₹49,47,368.

Answer: (d) Distribution of dividend out of grant is incorrect. In the second case, land should be recorded in the books of accounts at a nominal value.

Treatment of Cash Grant of ₹8 Crores:

Under AS 12 – Accounting for Government Grants, government grants should not be utilised or applied in a manner inconsistent with the conditions attached to the grant. A grant received for setting up a factory in a backward area is a capital grant meant to incentivise investment in infrastructure. Distributing any portion of such a grant as dividend is incorrect because:

(i) The grant was received with a specific purpose — to fund/subsidise the capital expenditure of setting up the factory. Paying it out as dividend defeats that purpose entirely.

(ii) AS 12 implicitly requires that grants should be recognised in a manner consistent with the costs they are intended to compensate. A capital grant is typically credited to Capital Reserve (non-distributable) or netted against the cost of the fixed asset. In neither treatment is it available for dividend distribution.

Therefore, the distribution of ₹2 crores as dividend out of the grant of ₹8 crores is incorrect and not in accordance with AS 12.

Treatment of Non-Monetary Grant (Land received free of cost):

AS 12 specifically addresses the treatment of non-monetary government grants (such as land, buildings, or other resources). As per the standard, where a government grant is in the form of a non-monetary asset given free of cost, the asset should be recorded at a nominal value.

Not recording the land at all in the books of accounts is incorrect. The rationale is that even though no consideration has been paid, the Company has received a tangible economic resource (land) from the government, and the principle of completeness in accounting requires that all assets be reflected in the financial statements. The AS 12 provision for nominal value recognition ensures the asset appears on the Balance Sheet while acknowledging the nil cost incurred.

The corresponding credit for a grant in the form of land is typically made to Capital Reserve (or a Government Grant account), which is a non-distributable reserve.

Conclusion: Both treatments adopted by RTS Ltd are incorrect. The dividend distribution from the grant violates the purpose and spirit of AS 12, and the failure to record the land contradicts AS 12's explicit requirement to record non-monetary grants at nominal value. The correct answer is (d).