Accounting for Revenue and Account Receivables

1. Amount of Sales to be recorded: During the year 2011-

12, the invoice value of goods sold by Avon Corporation
amounted to Rs. 325 million. The company offered trade
discount aggregating to Rs. 10 million. Out of the sales
achieved, the company paid Rs. 30 million towards
excise duty to the government. In addition, the sales tax
at 10% of the net invoice price was collected by the
company and paid to the government. The company
normally sells goods on credit of 60 days and offers a
cash discount of 1% if payment is made by the customer
within 10 days of sales. How will the revenue from sales
be shown in the profit and loss account for the year 2011-
12?

Solution :
Sales at Invoice Price : 325
Less : Trade Discount : 10
Balance : 315

Sales of 315 is inclusive of excise duty of 30 million. In the profit and

loss account the revenue from sales will appear as follows:
Gross Sales : 315
Less Excise Duty : 30
Net Sales :285
Sales tax collected by the company at 10% will not be part of revenue
as this is collected by the company for onward payment to the
government. Cash discount if and when availed by the customer by
making prompt payment will be shown separately as an expense.
2. Revenue earned in Foreign Exchange: ALJ Limited is
a company largely catering to domestic markets. During
the year 2010-11, it received its maiden export order for
$2 million for supply of wheat export to the UAE. The
order was duly executed on 1 November 2010. The
BUYER was allowed a credit period of 90 days for
making payment. The rate of exchange on 1 November
2010 was Rs.45, whereas by the payments was received
on 30 January 2011 at Rs. 45.30. How will the above
transaction appear in the profit and loss account for the
year 2010-11?
Solution:
Profit and loss account for the year 2010-11
Sales ($2million at Rs. 45) : 90.00mn
Gain on account of foreign exchange difference: 0.60mn

Sales will be recorded using the exchange rate prevailing at the time of sales.
Subsequent exchange fluctuation will be recorded as a gain or loss without
altering the revenue recorded earlier.
3. Revenue from construction contract: Strong
Structure Limited was awarded a contract for
construction of a fly over by the government of Delhi
on 1 October 2008. The contract consideration was
fixed at Rs.280 crore. The fly over was completed in
the year 2010 with the following details:
Particulars 2008 2009 2010
Rs. Crs Rs. Crs Rs. Crs.
Cost 25 150 65
incurred
during the
year
Estimated 212 70 Nil
cost of work
yet to be
completed
Payment Nil 170 110
received
from the
client

The company uses the percentage of completion method

for recording revenue. The stage of completion of project
is determined by the proportion that contracts costs
incurred for work performed up to the balance sheet date
bear to the estimated total contract costs. Show the
revenue, cost and profit to be recorded from this contract.
 Solution:

SNo Particulars 2008 2009 2010

1 Cost incurred during the year 25 150 65

2 Cost incurred till date 25 175 240

3 Estimated cost of work yet to 212 70 Nil

be completed

4 Total estimated cost ( 2 + 3) 237 245 240

5 % of Work completed (2/4) 10.55% 71.43% 100%

6 Revenue for till date 29.54 200 280

7 Revenue recognised for the 29.54 170.46 80

year

8 Cost for the year 25 150 65

9 Profit for the year 4.54 20.46 15.00

4. Provision for doubtful debts: RB Limited, a steel trader

follows a very liberal credit policy of allowing 120 days
to its customer to pay against their purchases. This policy
has helped the company in attracting new customers but
 at the same time results in a high incidence of bad debts.
As on 31 March 2011, the company has total debtors of
15 million. The company classifies its customers in three
categories A, B and C based upon their credit worthiness.
The break-up of 15 million of sundry debtors is given as
follows:
Category Amount in (Rs. Million)
A 8.00
B 5.50
C 1.50

Based upon the past experience, it is estimated that 2%

of Category A, 3% of Category B and 5% of Category C
may not pay when due and have to be provided for. What
will be the impact of the above in the profit and loss
account for the year and balance sheet as on 31 March
2011?
Solution:
Provision for doubtful debts to be made:
(2% of 8 million+3% of 5.5 million+5% of 1.5 million = 0.40 million)

In the profit and loss account for the year, bad debts expenses account will appear
with other expenses at 0.40 million. In the balance sheet the sundry debtors will
appear as follows :
Sundry Debtors : 15.00 million
Less : Provision for Doubtful Debts : 0.40 million
Balance : 14.60 million

5. Sales on instalment basis: Satyam Machines Limited is

a manufacturer of high tech fabrication machines. Each
machine is sold on cash down price of 3 million. The
company also offers the same machine on instalment
payment basis. The customer buying on instalment basis
 can pay the amount in three equated annual instalments
of Rs.1.3 million each at the end of next three years. The
company sold a machine on 1 April 2011.
a. When will the revenue from sales be recorded and by
how much?
b. How will you treat the difference between the cash
down price (Rs.3 million) and instalment price (Rs.3.9
million)

Solution:

The revenue for Satyam Machines Limited is arising from two different sources – sale of
machine and interest earned on instalment sales. The sale of machine will be recorded on 1st
April 2011 at the normal cash down price of Rs. 3 million.

The difference between cash down price (3 million) and instalment price (3.9 million) is the
interest earned. As the instalments are being paid annually, interest earned (0.9 million) can
be apportioned over three years in the ratio of 3:2:1. Accordingly interest income will be
recognised at 0.45 million, 0.30 million and 0.15 million, respectively in 2011-12, 2012-13,
2013-14 respectively.

6. Accounting for accrued interest : RS Finance Limited

is a non-banking finance company in the business of
providing loans. On 1 October 2009, it gave a loan of Rs.
1,000,000 to Mr. Ram at 10% per annum to be repaid
after three years. Interest is to be paid quarterly. Mr. Ram
duly paid interest on 31 December 2009. However, it
failed to pay interest due for the next two quarters. On 1
July 2010, the company classified the account as
delinquent and decided to create a provision for the
same. How will this transaction appear in the profit and
loss account for the year 2009 -10 and 2010-11 and
balance sheet on 31 March 2010 and 31 March 2011?
Solution:
In profit and loss account for the year 2009-10, interest income for two quarters will
be recorded as income based upon accrual basis of accounting. Accordingly, Rs.
50,000 will appear as interest income. In the balance sheet the loan amount of
1,000,000 plus accrued interest for the quarter ended on 31st March 2010 .

The interest for quarter ended 30th June 2010 will accrue in the normal course and will
be recognized as income. On 1st July once the company has decided to treat the
account as doubtful further accrual of interest will cease and a provision for doubtful
debts will be created in respect of loan amount and the interest accrued till 30th June.