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

Sundaram Textiles Ltd. has a policy, well known to its workforce, of refunding the price of any garment returned within 30 days. At the balance sheet date, based on past experience, it estimates that returns of Rs 4,00,000 of sales already made are probable, and the cost of the returned goods is of no salvage value. How should the company treat this under AS 29 (Revised)?

A provision of Rs 4,00,000 should be recognised. The sale is a past event, the known refund policy creates a constructive obligation, an outflow is probable, and past experience gives a reliable estimate. So all AS 29 recognition conditions are satisfied.

  1. ARecognise a provision of Rs 4,00,000 because a present obligation exists from a past event and an outflow is probableCorrect
  2. BDisclose it as a contingent liability only, since returns have not yet occurred
  3. CIgnore it and account for refunds only when paid
  4. DCreate a general reserve of Rs 4,00,000 out of profits

Explanation

The sale is the past event, the published policy creates a constructive obligation, an outflow is probable and the amount is reliably estimated from experience. All recognition criteria are met, so a provision is made. Disclosure as a contingent liability applies only where the obligation is possible or not reliably measurable.

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