Mithya Ltd. entered into agreement with Satya Ltd. for sale of goods costing 8 lakh at a profit of 20% on cost. The sale transaction took place on…

In the given case, Mithya Ltd. concurrently agreed to repurchase the same goods from Satya Ltd. on 1st February, 2024. Also the re-selling price is pre-determined and covers purchasing and holding costs of Satya Ltd. Hence, the transaction between Mithya Ltd. and Satya Ltd. on 1st February, 2024 should be accounted for as financing rather than sale. The resulting cash flow of 9.60 lakh received by Mithya Ltd., cannot be considered as revenue as per AS 9 “Revenue Recognition”. Journal Entries in the books of Mithya Ltd. ₹ in lakh 1.2.2024 Bank Account Dr. 9.60 To Advance from Satya Ltd*. 9.60 (Being advance received from Satya Ltd. amounting [8lakh + 20% of 8lakh = 9.60 lakh] under sale and re-purchase agreement) 31.3.2024 Financing Charges Account Dr. 0.40 To Satya Ltd. 0.40 (Financing charges for 2 months [(10.80 – 9.60) x 2/6]) 31.3.2024 Profit and Loss Account Dr. 0.40 To Financing Charges Account 0.40 (Being amount of finance charges transferred to P&L Account) * The balance of Satya Ltd.'s account will be disclosed as an advance under the heading liabilities in the balance sheet of Mithya Ltd. as on 31st March, 2024.