CA Inter P1 · Chapter 6
Revenue Based Accounting Standards MCQs with Answers
8 multiple-choice questions on Revenue Based Accounting Standards for CA Inter P1 Advanced Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Case: Tungabhadra Builders Ltd has a fixed price contract for ₹1,20,00,000. Costs incurred to date are ₹42,00,000 and estimated costs to complete are ₹63,00,000. Stage of completion is measured by the proportion of costs incurred. The profit to be recognised to date under AS 7 is:
- A) ₹48,00,000
- B) ₹10,00,000
- C) ₹6,00,000
- D) ₹15,00,000
Show answer & explanation
Answer: C) ₹6,00,000
Total estimated cost = 42,00,000 + 63,00,000 = 1,05,00,000; stage of completion = 42,00,000/1,05,00,000 = 40%. Contract revenue recognised = 1,20,00,000 x 40% = 48,00,000. Profit = 48,00,000 - 42,00,000 = ₹6,00,000, which also equals total expected profit 15,00,000 x 40%.
Question 2
Case: Kshitij Projects Ltd's fixed price contract has a price of ₹80,00,000. Costs to date are ₹30,00,000 and estimated costs to complete are ₹60,00,000. The loss to be recognised in the current year under AS 7 is:
- A) ₹3,33,333
- B) ₹10,00,000
- C) ₹6,66,667
- D) ₹0
Show answer & explanation
Answer: B) ₹10,00,000
Total expected cost = 30,00,000 + 60,00,000 = 90,00,000, which exceeds the contract price by 10,00,000. AS 7 requires an expected loss on a contract to be recognised as an expense immediately, irrespective of the stage of completion. Recognising only the proportionate loss (3,33,333) is incorrect.
Question 3
Under AS 7, which of the following costs is included in contract costs?
- A) General administration costs not specifically reimbursable under the contract
- B) Selling costs
- C) Depreciation of idle plant not used on any particular contract
- D) Depreciation of plant and equipment used on the contract
Show answer & explanation
Answer: D) Depreciation of plant and equipment used on the contract
Contract costs comprise costs directly related to the contract (including depreciation of plant used on the contract), costs attributable to contract activity in general that can be allocated, and costs specifically chargeable to the customer. AS 7 excludes selling costs, non-reimbursable general administration costs, and depreciation of idle plant not used on a particular contract.
Question 4
Case: On a construction contract of Rajmahal Constructions Ltd, costs incurred to date are ₹42,00,000 and recognised profits to date are ₹6,00,000. Progress billings raised to date are ₹45,00,000, of which ₹3,90,000 is still unpaid by the customer. Under AS 7, the gross amount due from the customer for contract work is:
- A) ₹6,90,000
- B) ₹48,00,000
- C) ₹3,00,000
- D) ₹90,000
Show answer & explanation
Answer: C) ₹3,00,000
The gross amount due from customers = costs incurred plus recognised profits (less recognised losses) less progress billings = 42,00,000 + 6,00,000 - 45,00,000 = ₹3,00,000. The unpaid billing of 3,90,000 is a trade receivable and is not part of this computation.
Question 5
Case: At the buyer's request, Rangoli Furnishings Ltd has invoiced goods but agreed to hold them in its warehouse until the buyer's new showroom is ready. Title has passed, the buyer has accepted billing, the goods are identified and ready for delivery, and the buyer acknowledges the deferred delivery instructions. Under AS 9, revenue should be recognised:
- A) Only when the cash is received
- B) Proportionately over the holding period
- C) When the buyer accepts title and billing, even though delivery is delayed
- D) Only when the goods are physically delivered
Show answer & explanation
Answer: C) When the buyer accepts title and billing, even though delivery is delayed
Under AS 9, revenue from sale of goods is recognised when significant risks and rewards of ownership are transferred and no significant uncertainty exists regarding consideration. In a bill-and-hold sale where delivery is delayed at the buyer's request and the buyer takes title and accepts billing, revenue is recognised notwithstanding that physical delivery has not been completed.
Question 6
Case: Kanchan Holdings Ltd holds shares in an investee company. For the investee's year ended 31 March, its board recommended a dividend on 20 April, which was approved by shareholders on 15 June. Under AS 9 (read with AS 4), dividend income should be recognised in Kanchan Holdings' books:
- A) Only when the dividend is actually received in cash
- B) In the next year, when its right to receive payment is established
- C) In the year ended 31 March, since the profits relate to that year
- D) On a time-proportion basis over the investee's financial year
Show answer & explanation
Answer: B) In the next year, when its right to receive payment is established
AS 9 requires dividends to be recognised when the owner's right to receive payment is established. That right did not exist at 31 March, so the dividend is recognised in the following year. Time-proportion basis applies to interest, and a cash basis is not appropriate once the right is established and collection is reasonably certain.
Question 7
Case: The sales account of Panna Gems Ltd includes ₹2,40,000 for goods sent to customers on 'sale or return' basis at cost plus 20%. The customers have not yet communicated acceptance and the return period has not expired. Under AS 9, the value at which these goods should be included in closing inventory is:
- A) ₹40,000
- B) ₹2,00,000
- C) ₹2,40,000
- D) ₹1,92,000
Show answer & explanation
Answer: B) ₹2,00,000
Revenue on goods sent on approval is recognised only when the buyer accepts the goods or the time for rejection has elapsed. The 2,40,000 must be reversed from sales and the goods included in inventory at cost: 2,40,000 x 100/120 = ₹2,00,000. Deducting 20% of the selling price (1,92,000) wrongly treats the mark-up as a margin on sales.
Question 8
Case: Revenue of ₹6,00,000 was correctly recognised by Mohan Spices Ltd on a sale in January. In March, the customer faced severe financial difficulties and collection became uncertain. Under AS 9, the company should:
- A) Treat the sale as a prior period item
- B) Retain the revenue and make a separate provision for the uncertainty of collection
- C) Defer the revenue until cash is collected
- D) Reverse the revenue of ₹6,00,000
Show answer & explanation
Answer: B) Retain the revenue and make a separate provision for the uncertainty of collection
AS 9 states that where an uncertainty about collectability arises subsequent to the time of sale, it is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded. Revenue is postponed only when the uncertainty exists at the time of sale.