Saharsh Ltd. is engaged in manufacturing of electric home appliances. The company is in the process of finalizing its accounts for the year ended…

CA Intermediate · Advanced Accounting · RTP · September 2026
Saharsh Ltd. is engaged in manufacturing of electric home appliances. The company is in the process of finalizing its accounts for the year ended 31.3.2025 and needs your expert advice on the following issues: (i) The company has its plants at 3 different locations. It has to shut down one of its plants due to internal reasons. The said plant site is under a rental agreement till 31.3.2026. The rent per month is ₹80,000. If the company cancels the agreement, it has to pay a penal amount equal to six month's rent. The company also has an option to sub-let the site at a rent of ₹45,000 per month. (ii) A case has been filed against the company in the consumer court and a notice for levy of a penalty of ₹20 lakhs has been received. The company has appointed a lawyer to defend the case for a fee of ₹2 lakhs. 50% of the fees has been paid and balance 50% will be paid after finalisation of the case. There are 75% chances that the penalty may not be levied. (iii) The company had committed to supply a consignment worth ₹1 crore to one of its dealers by the year-end. As per the contract, if delivery is not made on time, a compensation of 15% of the value is to be paid. While the consignment was in transit, one of the trucks carrying goods worth ₹30 lakhs met with an accident. It was however covered by Insurance. According to the surveyor's report, the policy amount is collectable, subject to 10% deduction. Before closing the books of accounts, the company has received the information that the policy amount has been processed and the dealer has also claimed for the compensation. Give your answers based on relevant Accounting standard.

Suggested Answer and Working Notes:

(i) As per AS 29, an 'onerous contract' is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. The unavoidable costs under a contract is the lower of net cost of fulfilling it and any compensation or penalties arising from failure to fulfil it. In the given case, Saharsh Ltd. is required to pay: In case of cancellation of agreement: = ₹80,000 x 6 months = ₹4,80,000 In case of continuance of agreement (in case of sub-let): Net of rent paid over rent collected from sub-tenant (₹80,000-45,000) x 12 = ₹4,20,000. Lower of the above is to be provided for i.e. ₹4,20,000 is to be provided for. (ii) As per AS 29, an obligation is a present obligation if, based on the evidence available, its existence at the balance sheet date is considered probable, i.e., more likely than not. Liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. In the given case, there are 75% chances that the penalty may not be levied. Accordingly, Saharsh Ltd. should not make the provision for penalty. However, a provision should be made for remaining 50% fees of the lawyer in the financial statements of financial year 2024-2025. (iii) Loss due to accident ₹30,00,000 Insurance claim receivable by company = ₹30,00,000 x 90% = ₹27,00,000 Loss to be recognised in the books for 2024-2025 ₹3,00,000 Insurance claim receivable to be recorded in the books ₹27,00,000 Compensation claim by dealer against company to be provided for in the books = ₹30,00,000 x 15% = ₹4,50,000* *Note: Alternatively, the compensation @ 15% can be computed on the whole contract amount of ₹1 crore. In such a situation, the compensation should be ₹15,00,000 (1 crore x 15%).

Topics: AS 29

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