Skip to content

CA Intermediate · Advanced Accounting · Framework for Preparation and Presentation of Financial Statements

Kaveri Textiles Ltd. signed a firm contract to buy a machine for Rs 40 lakh to be delivered next year. Nothing has been paid and no machine has been received by the balance sheet date. Under the Framework for Preparation and Presentation of Financial Statements, how should the company treat this at the balance sheet date?

Neither an asset nor a liability is recognised. The machine has not been delivered, so the company controls no resource and no past event has created a present obligation. The contract is an unperformed commitment, which may merely be disclosed, not recorded in the books.

  1. ARecognise an asset of Rs 40 lakh and a liability of Rs 40 lakh
  2. BRecognise only a liability of Rs 40 lakh
  3. CRecognise neither an asset nor a liability, as no past event has yet given rise to a present obligationCorrect
  4. DRecognise an expense of Rs 40 lakh in the statement of profit and loss

Explanation

A liability arises from a past event creating a present obligation. Under an executory contract nothing has been delivered, so no asset is controlled and no past event has occurred. Recognising asset and liability would be wrong because control of the machine has not passed.

Did you get it right without looking?

One question tells you little. A timed set on Framework for Preparation and Presentation of Financial Statements shows your real accuracy, how long you take and where you lose marks.

Practise Framework for Preparation and Presentation of Financial StatementsFree diagnostic mock

More Framework for Preparation and Presentation of Financial Statements questions