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

Sundaram Ltd. sold goods costing ₹4,00,000 to a customer for ₹5,00,000 on credit. Before year-end, the customer was declared insolvent, and it is certain that the ₹5,00,000 receivable will never be collected. Which statement best reflects the Framework's recognition approach?

The receivable should not be carried as an asset because future economic benefits are no longer probable. The full ₹5,00,000 is written off as a loss. Recognition requires probable inflow of benefits, which is absent when the customer is insolvent and nothing is recoverable.

  1. AThe receivable stays as an asset, since the sale was legally complete
  2. BThe inflow of future economic benefits is no longer probable, so the receivable should not be carried as an asset and the loss is recognisedCorrect
  3. COnly the profit of ₹1,00,000 is reversed, and the cost remains an asset
  4. DThe loss is shown only as a contingent liability

Explanation

An asset is recognised only when future economic benefits are probable and can be measured reliably. Since nothing will be collected, the receivable of ₹5,00,000 is written off as an expense or loss. Reversing only the ₹1,00,000 profit would wrongly keep the inventory cost of ₹4,00,000 alive as an asset.

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