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CA Intermediate · Advanced Accounting · AS 29 (Revised) Provisions, Contingent Liabilities and Contingent Assets

Sundaram Motors Ltd. leases a showroom on a non-cancellable basis and has vacated it, with Rs 6 lakh of unavoidable lease payments remaining. It estimates it could sublet the premises, but that income is uncertain. Separately, it expects to incur Rs 15 lakh of operating losses next year from its ongoing Chennai unit. Which of the following is correct under AS 29?

Only Rs 6 lakh should be provided. The non-cancellable lease on vacated premises is an onerous contract, giving a present obligation for the unavoidable payments. Expected future operating losses of Rs 15 lakh are not provided since no past event has created an obligation for them.

  1. AProvide Rs 21 lakh for both items
  2. BProvide Rs 15 lakh for future operating losses only
  3. CProvide Rs 6 lakh for the onerous lease only and no provision for future operating lossesCorrect
  4. DMake no provision for either item

Explanation

A non-cancellable lease on vacated premises is an onerous contract, so the unavoidable cost of Rs 6 lakh is provided, being the present obligation under the contract. Provisions are not recognised for future operating losses because there is no present obligation from a past event. Hence only Rs 6 lakh is provided; Rs 21 lakh wrongly includes the future losses.

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