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CMA Intermediate · Corporate Accounting and Auditing · Inventories (Ind AS 2)

Kaveri Textiles bought goods for ₹10,00,000 on normal credit terms of cash price payable immediately. The supplier allowed deferred settlement: ₹10,60,000 payable after 12 months. How should the ₹60,000 difference be treated under Ind AS 2?

The ₹60,000 is recognised as interest expense over the financing period. Because the deferred settlement contains a financing element, the excess over the normal credit price is not part of inventory cost, which remains ₹10,00,000.

  1. AAdded to the cost of inventories
  2. BDeducted from the cost of purchases as a rebate
  3. CRecognised as interest expense over the period of financingCorrect
  4. DIgnored and shown as a contingent liability

Explanation

Where the arrangement effectively contains a financing element, the difference between the normal credit price (₹10,00,000) and the amount paid (₹10,60,000) is interest expense recognised over the financing period. Inventory stays at ₹10,00,000, so adding the ₹60,000 to cost is wrong.

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