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

Sagar Ltd is a joint operator with a 40% share in a joint operation (JO) that is not a separate entity. Sagar buys inventory from the JO for ₹5,00,000. The JO's cost was ₹4,00,000. At the reporting date Sagar still holds all of the inventory, and there is no evidence of any fall in its net realisable value. How much of the gain on this purchase may Sagar recognise in the current period?

Nil. When a joint operator purchases assets from a joint operation, it does not recognise its share of the gain until it resells those assets to a third party. The inventory is still held and its value has not fallen, so no part of the ₹1,00,000 gain is recognised.

  1. A₹40,000, being its 40% share of the ₹1,00,000 gain
  2. B₹60,000, being the share of the other operators
  3. CNil, because gains are recognised only when the assets are resold to a third partyCorrect
  4. D₹1,00,000, being the entire gain

Explanation

On a purchase of assets from a joint operation, the joint operator does not recognise its share of the gains or losses until it resells the assets to a third party. The inventory is unsold, so no gain is recognised. The ₹40,000 option applies the share of the gain too early, and the ₹60,000 option mixes up the rule for sales with the rule for purchases.

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