ANALYSE whether the accounting treatment made by the accountant with respect to sale of goods to Chola Ltd. is in compliance of the Ind AS. If not,…

6 As per Ind AS 115 “Revenue from Contracts with Customers" – The contract includes a significant financing component. This is evident from the difference between the amount of promised consideration of 5,00,000 and the cash selling price of 4,75,000 at the date that the goods are transferred to the customer. The contract includes an implicit interest rate of 5.36 per cent (i.e. the interest rate that over 2 years discounts the promised consideration of 5,00,000 to the cash selling price of 4,75,000). This has been shown in the calculation below. The fair value of consideration (cash price equivalent) of the sale of goods is calculated as follows: Year Consideration (Instalment) Present value factor Present value of consideration Time of Sale 1,66,666 - 1,66,666 End of 1st year 1,66,667 0.949 1,58,167 End of 2nd year 1,66,667 0.901 1,50,167 Total 5,00,000 4,75,000 In order to determine the transaction price, Rathvaan must adjust the promised amount of consideration (as shown above) for the effects of the time value of money since the contract includes a significant financing component. The revenue from sale of goods shall be recognised at the fair value of the consideration received or receivable. The fair value of the consideration is determined by discounting all future receipts using an imputed rate of interest where the receipt is deferred beyond normal credit terms. The difference between the fair value and the nominal amount of the consideration is recognised as interest revenue. At the time of initial recognition, Rathvaan will recognize the revenue from the sale of goods and finance income by recording a total sales value of 4,75,000, of which - 1,66,666 is received in cash and - 3,08,334 is recognized as a trade receivable. Accordingly, the accounting entry will debit Cash by - 1,66,666 and Trade Receivable by - 3,08,334, and credit Sales by - 4,75,000. In second year beginning, Rathvaan will recognize the interest income and the receipt of the second installment by recording a cash inflow of 1,66,667. Out of this amount,16,527 is recognized as interest income earned, and the remaining - 1,50,140 is adjusted against the outstanding trade receivable. Accordingly, the accounting entry will debit Cash by - 1,66,667, credit Interest Income by - 16,527, and credit Trade Receivable by - 1,50,140. At the time of final settlement, Rathvaan will recognize the interest income and the payment of the final installment by recording a cash inflow of 1,66,667. Of this amount,8,473 is recognized as interest income, and the remaining - 1,58,194 is adjusted against the outstanding trade receivable. Accordingly, the accounting entry will debit Cash by - 1,66,667, credit Interest Income by - 8,473, and credit Trade Receivable by - 1,58,194. Statement of Profit and Loss (extracts) for the year ended 31st March, 2025 and 31st March, 2026 Income As at 31st March, 2025 As at 31st March, 2026 Revenue From Operations (Sale of Goods) 4,75,000 - Other Income (Finance Income) 16,527 8,473 Balance Sheet (extracts) as at 31st March, 2025 and 31st March, 2026 Assets As at 31st March, 2025 As at 31st March, 2026 Financial Assets: Trade Receivables 1,58,194 XXX