On 1 st April, 20X1, entity A entered into a single transaction with three identifiable separate components: 1. Sale of a good (i.e. engineering…

CA Final · Financial Reporting · MTP · May 2024
On 1 st April, 20X1, entity A entered into a single transaction with three identifiable separate components: 1. Sale of a good (i.e. engineering machine); 2. Rendering of services (i.e. engineering machine maintenance services on 30 th September, 20X1 and 1 st April, 20X2); and 3. Providing finance (i.e. sale of engineering machine and rendering of services on extended period credit). The cost of manufacturing the machine to A Ltd. was - 1,60,000. It is possible for a customer to purchase both the machine 'model pi' and the maintenance services separately. Mr. Anik is contractually obliged to pay A Ltd - 4,00,000 on 1 st April, 20X2. The prevailing rate for one-year credit granted to trade customers in the industry is 5 percent per six-month period. As per the experience, the servicing of the machine 'model pi' sold to Mr. Anik is expected to cost A Ltd.30,000 to perform the first service and - 50,000 to perform the second service. Assume actual costs equal expected costs. When A Ltd. provides machine services to customers in a separate transaction it earns a margin of 50% on cost. On 1 st April, 20X1, the cash selling price of the machine 'model pi' sold to Mr. Anik is 2,51,927. The promised supply of machine 'model pi' and maintenance service obligations are satisfactorily carried out in time by the company. You are required to: (i) Segregate the components of the transaction that A Ltd. shall apply to the revenue recognition criteria separately as per Ind AS 115; (ii) Calculate the amount of revenue which A Ltd. must allocate to each component of the transaction; and (iii) Prepare journal entries to record the information set out above in the books of accounts of A Ltd. for the years ended 31 st March 20X2 and 31 st March 20X3.

Suggested Answer and Working Notes:

(i) On 1 st April, 20X1, entity A entered into a single transaction with three identifiable separate components: 1. Sale of a good (i.e. engineering machine); 2. Rendering of services (i.e. engineering machine maintenance services on 30 th September, 20X1 and 1 st April, 20X2); and 3. Providing finance (i.e. sale of engineering machine and rendering of services on extended period credit). (ii) Calculation and allocation of revenue to each component of the transaction Date Opening balance Finance income Goods Services Payment received Closing balance 1 st April, 20X1 – – 2,51,927 – – 2,51,927 30 th September, 20X1 2,51,927 12,596 (Note 1) – 45,000 – 3,09,523 31 st March 20X2 3,09,523 15,477 (Note 2) – – – 3,25,000 1 st April, 20X2 3,25,000 – – 75,000 (4,00,000) – Notes: 1. Calculation of finance income as on 30 th September, 20X1 = 5% x 2,51,927 = 12,596 2. Calculation of finance income as on 31 st March, 20X2 = 5% x 3,09,523 = 15,477 (iii) Journal Entries Date Particulars Dr. (₹) Cr. (₹) 1 st April, 20X1 Mr. Anik Dr. 2,51,927 To Revenue - sale of goods (Profit or loss A/c) 2,51,927 (Being revenue recognised from the sale of the machine on credit) Cost of goods sold (Profit or loss) 1,60,000 To Inventories 1,60,000 (Being cost of goods sold recognised) 30 th September 20X1 Mr. Anik Dr. 12,596 To Finance Income (Profit or loss) 12,596 (Being finance income recognised) Mr. Anik Dr. 45,000 To Revenue- rendering of services (Profit or loss) 45,000 (Being revenue from the rendering of maintenance services recognised) Cost of services (Profit or loss) 30,000 To Cash/Bank or payables 30,000 (Being the cost of performing maintenance services recognised) 31 st March 20X2 Mr. Anik Dr. 15,477 To Finance Income (Profit or loss) 15,477 (Being finance income recognised) 1 st April, 20X2 Mr. Anik Dr. 75,000 To Revenue - rendering of services (Profit or loss) 75,000 (Being revenue from the rendering of maintenance services recognised) Cost of services (Profit or loss) 50,000 To Cash/Bank or payables 50,000 (Being the cost of performing maintenance services recognised) Cash/Bank Dr. 4,00,000 To Mr. Anik 4,00,000 (Being the receipt of cash from the customer recognised)

Topics: Ind AS 115

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