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 2025-26, 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. In the given case, Giant Ltd. should recognise a liability of ₹1,00,000 to Tiny Ltd. 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 present case, flow of future economic benefit from the machine to the enterprise is improbable. The entire amount of purchase price of the machine should be recognised as an expense. The accounting entry is suggested below: Particulars ₹ ₹ Loss on change in production Method Dr. 1,00,000 To Gamma Ltd. 1,00,000 (Loss due to change in production method) Profit and loss A/c Dr. 1,00,000 To Loss on change in production method 1,00,000 (loss transferred to profit and loss account)