Copyright 2012 Dorling Kindersley (India) Pvt.

Ltd

Chapter 6: Accounting for Revenue and Accounts Receivables

Multiple Choice Questions

1. Ess Dee Limited sold goods worth ` 3 million on 1st February 2011 giving 3 month credit period to its customer. The amount was duly collected on 30th April 2011. In which accounting year the revenue will be recognised assuming company follows the financial year as its accounting period? a. 2010-11 b. 2011-12 c. Either a) or b) based upon managements discretion d. `2 million in 2010-11 and `1 million in 2011-12. e. None of the above 2. Which of the following is not netted from revenue from sales of goods but is shown separately as an expense: a. Sales Tax b. Cash Discount c. Trade Discount d. Value Added Tax e. Quantity Discount 3. Dee Pee Limited sells its products on consignment basis where in goods are sent to the consignee. The consignee sells the goods on which he is paid commission. The amount collected by consignee from the customer is then remitted to Dee Pee Limited. When will the revenue from sales be recognized:

Sanjay Dhamija

Financial Accounting for Managers

Copyright 2012 Dorling Kindersley (India) Pvt. Ltd

a. When goods are dispatched by Dee Pee Limited to the consignee b. When goods are sold be the consignee c. When sales consideration is collected by the consignee d. When sales consideration is received by Dee Pee Limited e. Either a) or b) above 4. Hind Computeck Limited provides maintenance services for computers to its customers. It entered into an Annual Maintenance Contract with its customer on 1st January 2011 for a period of 12 month and received ` 120,000 towards the AMC charges. How much of the revenue will be recognized during 2010-11? a. `120,000 b. Nil c. `30,000 d. `90,000 e. None of the above

5. Revenue from construction contracts is recognized: a. Upon signing the contract b. Upon completion of the contract c. Upon receiving the payment from the customer d. With reference to the extent of completion of the accounting period e. b) or c) above whichever occur earlier 6. During the year 2011-12, Aar Dee Limited made cash sales of `30 million and credit sales of `70 million. Out of the credit sales, amount of `45 million was collected within the year. The contract activity during the

Sanjay Dhamija

Financial Accounting for Managers

Copyright 2012 Dorling Kindersley (India) Pvt. Ltd

company also received an order from a customer with an advance of `5 million. How much revenue from sales should be recognized during the year 2011-12? a. `100 million b. `75 million c. `80 million d. `105 million e. `150 million 7. Based upon the above, what will be the amount of Sundry Debtors in the Balance Sheet on 31st March 2012? a. `100 million b. `105 million c. `95 million d. `25 million e. `20 million 8. Miser Limited is cash rich company engaged in the trading of precious stones. It kept a deposit of `50 Crores with the Times Bank for a period of 1 year on 1st July 2011. The deposit matured on 30th June 2012 with interest @ 9% per annum. How much the interest income should be recognized in the Profit & Loss Account of the company for the year ended 31st March 2012? a. Nil b. `4.5 Crores c. `3.375 Crores d. Either a) or b) above e. Either b) or c) above

Sanjay Dhamija

Financial Accounting for Managers

Copyright 2012 Dorling Kindersley (India) Pvt. Ltd

9.

Sukhdham Exports Limited exported goods invoiced at $20 million on 15th March 2012. On the date of the export the exchange rate was $=`49. On 31st March 2012 i.e. the date of the Balance Sheet the exchange rate was `49.20. The payment was received on 15th May 2012 with exchange rate of `49.50. The revenue will be recognized for: a. `990 million b. `980 million c. `984 million d. `985 million e. Either of the above at the discretion of the management

10. Daredevils Limited has trade receivable of `230 million on 31st March 2012. One of the customer from whom `2 million has agreed to pay only 50% of the amount due and the balance has to be written off. The company also has decided to make a provision for doubtful debts @2% of amount outstanding. What will be the impact on the Profit & Loss A/c on account of bad debts and provisions for doubtful debts: a. `6.6 million b. `5.6 million c. `6.56 million d. `5.56 million e. `4.6 million

Objective Type Questions

1. Name them: a. Method of revenue recognition from services where revenue is recognized upon completion of a contract b. Discount offered to the customer for prompt collection

Sanjay Dhamija

Financial Accounting for Managers

Copyright 2012 Dorling Kindersley (India) Pvt. Ltd

c. Sale agreement where the buyer is given an option to return the goods within a specified period of time d. Provision made to meet the loss arising from probable defaults by the customers e. Date fixed by the company to ascertain eligibility to receive dividend 2. True or False a. Revenue from sales of goods is recognized once the goods has been delivered to the buyer b. Advance received from a customer is not recognized as revenue c. Interest income accrues on a time proportionate basis d. If some of the customers to whom goods were sold on credit basis fail to pay on due date, the revenue recorded earlier will be reversed e. Income from services can be recognized only when all the services as per the contract have been performed f. If goods are sold on installment basis, sales will be recorded when all the installments have been received

Answers to Multiple Choice Questions

1. a) Sales are recorded on accrual basis when ownership in goods is transferred to the buyer. 2. b) Cash discount is not deducted from sales but is shown separately as an expense. 3. b) Sales are recorded when goods are sold by the consignee to a third party. 4. c) On time proportionate basis, revenue for 3 months i.e. `30,000 will be recorded in 2010-11. 5. d) 6. a) Advance received or amount yet to be collected have no bearing on revenue recognition. 7. d) Out of `70 million credit sales, an amount of 45 million has been collected during the year. Balance `25 million will appear in the Balance Sheet as Sundry Debtors. 8. c) Interest will accrue on time proportionate basis; interest for the period of 9 months (1st July 2011 to 31st March 2012) will be recognized in the year 2011-12. 9. b: revenue will be recognized at the rate of exchange prevailing on the date of the transaction i.e. `49.

Sanjay Dhamija

Financial Accounting for Managers

Copyright 2012 Dorling Kindersley (India) Pvt. Ltd

10. d: `1 million of write off (50% of `2 million) plus 2% of rest of the debtors (`230 million less `2 million) 1. Name them a. b. c. d. e. Completed contract method Cash discount Sales on Approval basis Provision for Doubtful Debts Record Date

2. True of False a. False: Once the ownership has been transferred. Delivery of goods and transfer of ownership may not coincide. b. True: Revenue is recognized once the seller has completed his part of obligation. c. True: Interest accrues with reference to amount, rate of interest and time d. False: The loss due to non recovery will be recorded separately rather than adjusting the revenue recorded earlier. e. False: Income for services is recognized either on Completed Contract basis or Proportionate Completion basis. f. False: Sales will be recorded once the ownership has been transferred to the buyer.

Sanjay Dhamija

Financial Accounting for Managers