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CMA Final · Corporate Financial Reporting · Accounting and Reporting of Joint Operation

Alpha Ltd is a joint operator in a joint operation with a 40% share in assets, liabilities, revenue and expenses. The joint operation sells inventory costing ₹5,00,000 to Alpha Ltd for ₹6,50,000. At the year end Alpha Ltd has not resold any of this inventory to third parties. What is Alpha Ltd's treatment of its share of the profit on this purchase?

Alpha Ltd should recognise none of its share of the profit. When a joint operator buys assets from the joint operation, it defers its share of any gain or loss until the assets are resold to a third party, and no resale has occurred.

  1. ARecognise ₹60,000 as profit, being 40% of ₹1,50,000
  2. BRecognise ₹90,000 as profit, being 60% of ₹1,50,000
  3. CRecognise the full profit of ₹1,50,000 as income
  4. DRecognise no share of the profit until the inventory is resold to a third partyCorrect

Explanation

Under Ind AS 111 (para B36), a joint operator purchasing assets from a joint operation does not recognise its share of gains or losses until it resells those assets to a third party. No resale has happened, so no profit is recognised. Options with ₹60,000 or ₹90,000 wrongly apply a share to unrealised profit.

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