Giant Ltd. has entered into a binding agreement with Tiny Ltd. to buy a custom-made machine of 1,00,000 at the end of 2024-25, before delivery of…

A liability is recognized when outflow of economic resources in settlement of a present obligation can be anticipated and the value of outflow can be reliably measured. When flow of economic benefit to the enterprise beyond the current accounting period is considered improbable, the expenditure incurred is recognised as an expense rather than as an asset. In the given case, Giant Ltd. should recognise a liability of 1,00,000 to Tiny Ltd. Also, the flow of future economic benefit from the machine to the enterprise is improbable. Thus, the entire amount of purchase price of the machine should be recognised as an expense. Journal Entries Particulars Dr Loss on Change in Production Method 1,00,000 To Tiny Ltd. 1,00,000 (Being loss due to change in production method) Profit & Loss A/c 1,00,000 To Loss on Change in Production Method 1,00,000 (Being loss transferred to P&L)