Given the following information of Rainbow Ltd. On 15th November, goods worth - 5,00,000 were sold on approval basis. The period of approval was 4…

As per AS 9 “Revenue Recognition”, 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 - 5,00,000 as the time period for rejecting the goods had expired. The sale is complete but delivery has been postponed at buyer's request. The entity should recognize the entire sale of 2,40,000 for the year ended 31st March. Sale/repurchase agreements i.e. where seller concurrently agrees to repurchase the same goods at a later date, such transactions that are in substance a financing agreement, the resulting cash inflow is not revenue as defined and should not be recognized as revenue. Hence no revenue to be recognized in the given case. Revenue arising from the use by others of enterprise resources yielding interest and royalty should be recognized when no significant uncertainty as to measurability or collectability exists. The interest should be recognized on time proportion basis taking into account the amount outstanding and rate applicable. The royalty should be recognized on accrual basis in accordance with the terms of relevant agreement. 40% goods lying unsold with consignee should be treated as closing inventory and sales should be recognized for 2,40,000 (60% of 4,00,000). In case of consignment sale revenue should not be recognized until the goods are sold to a third party.