A Ltd. enters into a contract with a customer for the exclusive supply of paint for a three-year period. A Ltd. makes a ₹ 50,000 upfront payment,…

Treatment of upfront payment of ₹ 50,000Upfront payment of ₹ 50,000 would be accounted for as a reduction of the transaction price. It would be deferred and recognised as a reduction of revenue (in proportion to estimated sales) over the contract term.Accounting for Quarter 1 and Quarter 2 is as follows:For the first quarter Quarter 1 sales = ₹ 1,00,000 Entity estimates ₹10,00,000 sales over the three-year period Percentage of Quarter 1 sale to total estimated sale= (₹ 1,00,000 / ₹ 10,00,000) x 100 = 10% Share of upfront payment to be recognised in Quarter 1= 10% x ₹ 50,000 = ₹ 5,000 Hence, in Quarter 1, A Ltd. recognizes revenue of ₹ 95,000 (₹ 1,00,000 actual sales – ₹ 5,000 consideration paid to the customer)For the second quarter Quarter 2 sales = 1,25,000 A Ltd. updates its estimate of total sales over the contract to ₹ 15,00,000 Total sales to date till Quarter 2= ₹ 1,00,000 +₹ 1,25,000 = ₹ 2,25,000 Percentage of sale till Quarter 2 to total estimated sale= (₹ 2,25,000 / ₹ 15,00,000) x 100 = 15% Share of upfront payment to be recognised in Quarter 2= (15% x ₹ 50,000 upfront payment) – Upfront payment recognized in Quarter 1= ₹7,500 – ₹ 5,000 = ₹2,500 Hence, A Ltd. would recognize revenue of ₹ 1,22,500 for Quarter 2 (₹ 1,25,000 actual sales – ₹2,500 upfront payment made to the customer).