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

Mehta Exports Ltd. sold goods to Zenith Ltd. for Rs 5,00,000 under an arrangement where title passes on delivery, but the sale agreement also lets Mehta repurchase the goods next month at the same price plus a fixed charge, and Mehta retains control and the risks of ownership. Applying the Framework, how should Mehta account for the transaction?

Mehta should not record a sale but treat the receipt as a financing arrangement. Substance over form requires reflecting economic reality: it retains control and risks and will repurchase at a fixed price, so no genuine sale has occurred despite the legal title transfer.

  1. ARecord the full Rs 5,00,000 as sales because the legal form is a sale
  2. BDefer recognition of sale; treat as a financing arrangement, as substance over form requiresCorrect
  3. CRecord Rs 5,00,000 as other income
  4. DRecord it as a contingent asset

Explanation

Substance over form requires transactions to be accounted for by their economic reality, not legal form. Since Mehta keeps control and risks and will repurchase at a fixed price, there is no real sale; it is effectively a borrowing secured on goods. Recording sales would overstate revenue.

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