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CA Intermediate · Advanced Accounting · AS 9 Revenue Recognition

Arjun Ltd. entered into an agreement with Meera Ltd. to receive royalty on a patented process at 4% of Meera's sales, per the agreement, payable annually. Meera's sales for the year ended 31 March 2025 were Rs 75,00,000. As per the agreement, royalty is receivable for the year ended 31 March 2025 but Meera will pay it in July 2025. How much royalty should Arjun recognise for the year ended 31 March 2025 under AS 9?

Rs 3,00,000 should be recognised. AS 9 requires royalties to be recognised on an accrual basis following the substance of the agreement. Four percent of Rs 75,00,000 sales is Rs 3,00,000, earned in the year regardless of the later cash receipt in July.

  1. ARs 3,00,000 on accrual basisCorrect
  2. BNil, as it is received in July 2025
  3. CRs 75,000
  4. DRs 1,50,000

Explanation

Royalties are recognised on an accrual basis in accordance with the substance of the relevant agreement. Royalty = 4% x 75,00,000 = Rs 3,00,000, which relates to the year ended 31 March 2025 even though cash is received later. Nil would apply a cash basis, which AS 9 does not permit here.

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