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CMA Intermediate · Financial Accounting · Disclosure of Accounting Policies (AS 1)

Kaveri Traders has an expected profit of ₹2,40,000 on a pending export order not yet delivered, and a known liability for a court-awarded damages claim whose best estimate is ₹1,50,000 (exact amount uncertain). Applying the prudence consideration of AS 1, what is the effect on the year's profit statement?

The anticipated profit of ₹2,40,000 is not recognised because AS 1 prudence says profits are recognised only when realised, but ₹1,50,000 is provided for the known liability since provision is made for all known liabilities and losses at best estimate.

  1. ARecognise the ₹2,40,000 profit and ignore the damages claim until paid
  2. BRecognise neither the profit nor the damages claim
  3. CRecognise the ₹2,40,000 profit and provide ₹1,50,000 for damages
  4. DDo not recognise the ₹2,40,000 profit; provide ₹1,50,000 for damages as a best estimateCorrect

Explanation

Prudence under AS 1 means profits are not anticipated but recognised only when realised, while provision is made for all known liabilities and losses even if the amount is only a best estimate. So the ₹2,40,000 is not recognised and ₹1,50,000 is provided. Ignoring the damages would breach prudence.

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