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

Kaveri Textiles Ltd, a joint operator holding a 40% interest in a joint operation, purchases inventory from the joint operation for Rs 20,00,000. The joint operation's cost of this inventory was Rs 16,00,000. At the reporting date Kaveri still holds all the inventory, and there is no indication of any loss in its net realisable value. What is the correct accounting by Kaveri for its share of the joint operation's profit on this transaction?

Kaveri recognises none of its share of the profit now. When a joint operator buys assets from the joint operation, it defers its share of the gain or loss until it resells those assets to a third party. The inventory is still unsold, so recognition waits.

  1. ARecognise Rs 1,60,000 as profit immediately
  2. BRecognise Rs 4,00,000 as profit immediately
  3. CRecognise Rs 2,40,000 as profit immediately, being the other parties' 60% share
  4. DDo not recognise its share of the profit until the inventory is resold to a third partyCorrect

Explanation

On purchasing assets from a joint operation, the joint operator must not recognise its share of the gains or losses until it resells those assets to a third party. Total profit is 4,00,000 and Kaveri's 40% share is 1,60,000. That share stays unrecognised while the inventory is held. Recognising the other parties' 60% share applies to sales to a joint operation, not purchases.

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