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CA Intermediate · Advanced Accounting · AS 29 (Revised) Provisions, Contingent Liabilities and Contingent Assets

Bhavya Textiles Ltd. sold goods in March under a policy of refunding the price if a customer returns the item within 30 days. Past experience shows about 4% of sales are returned. Sales for March were Rs 50,00,000 and the refund obligation is a present obligation arising from past sales. What amount should be provided at the year-end for expected refunds (ignoring any margin on returned goods)?

A provision of Rs 2,00,000 should be made. The sale is the past event creating a present obligation to refund, the outflow is probable from experience, and the estimate is reliable at 4% of Rs 50,00,000. So recognition, not mere disclosure, is required.

  1. ARs 2,00,000Correct
  2. BRs 1,00,000
  3. CNil, disclosed as a contingent liability
  4. DRs 50,00,000

Explanation

Sales are an obligating event, the outflow is probable, and the amount can be estimated reliably. Provision = 4% x 50,00,000 = Rs 2,00,000. Treating it as a contingent liability is wrong because the obligation is present and probable.

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