Chapter 8: Revenue Based Accounting Standards - Test 3: answer key

Question 1 · 2 marks · Chapter 8: Revenue Based Accounting Standards · medium

Scenario. Zenith Tech Solutions Pvt Ltd. is finalising its financial statements for the year ended 31 March 2026. It has three major service contracts. (1) An Annual Maintenance Contract (AMC) for a manufacturing client, valued at ₹12,00,000, covering the period 1 January 2026 to 31 December 2026. The fee is non-refundable and payable upfront, which the client paid on 1 January 2026. (2) A specialised machine installation project for a power plant, valued at ₹5,00,000. The installation is a single, indivisible act which was completed and handed over to the client on 10 March 2026. (3) A custom software development contract for ₹20,00,000, started on 1 December 2025. The development involves multiple milestones and acts. As per the project engineer's survey, the work performed up to 31 March 2026 is 40% complete and the costs incurred match this progress. The CFO has recorded the entire AMC fee as revenue, the installation fee as revenue in March, and has not recognised any revenue for the custom software until the final delivery scheduled next year. The auditor is reviewing these treatments as per AS 9.

What amount of revenue from the Annual Maintenance Contract (AMC) should Zenith Tech Solutions recognize for the year ended 31 March 2026?

1. ₹12,00,000, because the non-refundable fee was fully received upfront
2. ₹9,00,000, because the contract period has partially elapsed
3. ₹3,00,000, based on the proportion of the service period elapsed up to the reporting date (correct answer)
4. Nil, because the service contract will be completed only in the next financial year

Answer: C — ₹3,00,000, based on the proportion of the service period elapsed up to the reporting date

Explanation. Revenue from rendering services is usually recognised as the service is performed. Where services are provided over a specific period, revenue is recognised on a proportionate completion basis (usually straight-line over time) unless another method better reflects the work performed. The contract runs from 1 January to 31 December 2026. For the year ended 31 March 2026, 3 out of 12 months have elapsed. Revenue = ₹12,00,000 × (3/12) = ₹3,00,000.

Where it goes wrong. Recognising the entire fee on receipt or applying the wrong time proportion.

Authority. AS 9 para 15

Question 2 · 2 marks · Chapter 8: Revenue Based Accounting Standards · medium

How should Zenith Tech Solutions recognise revenue for the specialised machine installation project?

1. Recognise ₹5,00,000 when the installation is fully completed and handed over on 10 March 2026 (correct answer)
2. Recognise ₹1,25,000 in the current year and the rest in the next year
3. Recognise ₹5,00,000 on the date of signing the contract
4. Do not recognise revenue until the entire plant commences commercial production

Answer: A — Recognise ₹5,00,000 when the installation is fully completed and handed over on 10 March 2026

Explanation. The Completed Service Contract Method is used when performance consists of the execution of a single act or when the services yet to be performed are so significant that performance is incomplete until the final act. The installation is a single, indivisible act completed on 10 March 2026. Therefore, the entire revenue of ₹5,00,000 is recognised on that date.

Where it goes wrong. Applying proportionate completion to a contract that is a single act.

Authority. AS 9 para 16

Question 3 · 2 marks · Chapter 8: Revenue Based Accounting Standards · hard

What is the correct method and amount of revenue recognition for the custom software development contract for the year ended 31 March 2026?

1. Completed service contract method; recognize Nil
2. Proportionate completion method; recognize ₹8,00,000 (correct answer)
3. Proportionate completion method; recognize ₹20,00,000
4. Completed service contract method; recognize ₹8,00,000

Answer: B — Proportionate completion method; recognize ₹8,00,000

Explanation. Where performance consists of the execution of more than one act, revenue is recognised proportionately by reference to the performance of each act (Proportionate Completion Method). The custom software development involves multiple milestones. Since the work is 40% complete based on the engineer's survey, revenue is ₹20,00,000 × 40% = ₹8,00,000.

Where it goes wrong. Deferring revenue until final delivery when the proportionate completion method should be applied.

Authority. AS 9 para 14

Question 4 · 2 marks · Chapter 8: Revenue Based Accounting Standards · hard

What is the total revenue Zenith Tech Solutions should recognize from all three contracts for the year ended 31 March 2026?

1. ₹17,00,000
2. ₹16,00,000 (correct answer)
3. ₹13,00,000
4. ₹8,00,000

Answer: B — ₹16,00,000

Explanation. AMC revenue = ₹3,00,000 (3/12 of ₹12,00,000). Installation revenue = ₹5,00,000 (completed on 10 March 2026). Custom software revenue = ₹8,00,000 (40% of ₹20,00,000). Total revenue = ₹3,00,000 + ₹5,00,000 + ₹8,00,000 = ₹16,00,000.

Where it goes wrong. Incorrectly including the full AMC amount or omitting the software revenue.

Authority. AS 9 para 14; AS 9 para 15; AS 9 para 16

Question 5 · 2 marks · Chapter 8: Revenue Based Accounting Standards · hard

Scenario. Vardhan Chemicals Ltd. has a diverse investment and sales portfolio for the year ended 31 March 2026. (1) It holds 10,000 equity shares in a listed entity. The investee company proposed a dividend of ₹5 per share on 15 April 2026 and formally declared it on 10 May 2026; Vardhan received the dividend on 20 May 2026. (2) Vardhan licensed a patented chemical formula to a subsidiary. The agreement states a royalty of 5% on gross sales of the subsidiary, payable annually. The subsidiary's sales for the year were ₹2,00,00,000. (3) On 1 February 2026, Vardhan sent goods on consignment to a retail outlet, invoicing them at ₹15,00,000 (cost ₹10,00,000). By 31 March 2026, the retail outlet had sold 70% of these goods to end customers for ₹12,50,000. The outlet sent the periodic sales statement on 5 April 2026. (4) Vardhan sold goods worth ₹8,00,000 on 1 March 2026 to a customer on a 6-month installment basis. At the time of sale, the customer's ability to pay was highly doubtful. However, on 15 March 2026, the customer secured a bank loan and paid the entire amount of ₹8,00,000 upfront. Vardhan wants to recognise all the above revenues in the current financial year.

When should Vardhan Chemicals Ltd. recognise the dividend revenue from its equity shares for the year ended 31 March 2026?

1. Recognise Nil in the current year, as the right to receive was established only on 10 May 2026 (correct answer)
2. Recognise ₹50,000 on 15 April 2026, when the dividend was proposed
3. Recognise ₹50,000 on 31 March 2026, by accrueing it as it relates to the current year
4. Recognise ₹50,000 on 20 May 2026, when the cash was actually received

Answer: A — Recognise Nil in the current year, as the right to receive was established only on 10 May 2026

Explanation. Dividend revenue is recognised only when the owner's right to receive payment is established. The dividend was proposed on 15 April 2026 and formally declared on 10 May 2026. At the reporting date of 31 March 2026, no right to receive existed. Therefore, no revenue can be recognised in the financial year 2025-26. It is recognised in the year of declaration.

Where it goes wrong. Accruing dividend revenue based on the financial year it relates to, rather than when the right is established.

Authority. AS 9 para 8.3

Question 6 · 2 marks · Chapter 8: Revenue Based Accounting Standards · medium

On what basis and for what amount should Vardhan Chemicals Ltd. recognise the royalty revenue from its patented chemical formula?

1. On a cash basis; recognize only when the subsidiary pays the royalty
2. On a time proportion basis; recognize ₹2,50,000 evenly over the year
3. On an accrual basis as per the agreement; recognize ₹10,00,000 (correct answer)
4. On a proportionate completion basis; recognize ₹5,00,000

Answer: C — On an accrual basis as per the agreement; recognize ₹10,00,000

Explanation. Royalties are recognized on an accrual basis in accordance with the terms of the relevant agreement. The agreement specifies a 5% royalty on gross sales. The subsidiary's gross sales for the year are ₹2,00,00,000. Therefore, the royalty revenue is ₹2,00,00,000 × 5% = ₹10,00,000.

Where it goes wrong. Recognizing royalty on a cash basis or calculating it on an incorrect base.

Authority. AS 9 para 8.2

Question 7 · 2 marks · Chapter 8: Revenue Based Accounting Standards · hard

What amount of revenue should Vardhan Chemicals Ltd. recognize from the consignment sale for the year ended 31 March 2026?

1. ₹12,50,000, being the amount realized by the retail outlet from end customers (correct answer)
2. ₹15,00,000, being the full invoice value of goods sent on consignment
3. Nil, because the sales statement was received only on 5 April 2026
4. ₹10,50,000, being 70% of the invoice value

Answer: A — ₹12,50,000, being the amount realized by the retail outlet from end customers

Explanation. In a consignment sale, revenue should not be recognized until the goods are sold to a third party. By 31 March 2026, 70% of the goods were sold to end customers for ₹12,50,000. The receipt of the periodic sales statement after the year-end is supporting evidence of a sale that occurred before the reporting date. Revenue is recognized at the actual third-party sale proceeds of ₹12,50,000.

Where it goes wrong. Recognizing the full invoice value or calculating 70% of the invoice value instead of using actual sale proceeds.

Authority. AS 9 para 11

Question 8 · 2 marks · Chapter 8: Revenue Based Accounting Standards · hard

How should Vardhan Chemicals Ltd. account for the installment sale where the customer initially had doubtful creditworthiness but paid in full on 15 March 2026?

1. Recognise Nil revenue on 1 March 2026, and recognise ₹8,00,000 revenue on 15 March 2026 when the uncertainty was resolved (correct answer)
2. Recognise ₹8,00,000 on 1 March 2026 and create a provision for doubtful debts until payment
3. Recognise ₹4,00,000 on 1 March 2026 and ₹4,00,000 on 15 March 2026
4. Recognise the revenue only when the 6-month installment period ends

Answer: A — Recognise Nil revenue on 1 March 2026, and recognise ₹8,00,000 revenue on 15 March 2026 when the uncertainty was resolved

Explanation. Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising a claim or sale, revenue recognition is postponed to the extent of uncertainty involved. On 1 March 2026, collection was highly doubtful, so no revenue was recognized. When the customer secured a loan and paid on 15 March 2026, the uncertainty ceased to exist, and the revenue of ₹8,00,000 is recognized on that date.

Where it goes wrong. Recognizing revenue at the time of sale and creating a provision, instead of postponing revenue recognition.

Authority. AS 9 para 10

Question 9 · 2 marks · Chapter 8: Revenue Based Accounting Standards · medium

Scenario. A company bills a client for advertising services. The gross media cost is ₹10,00,000 and the agency's commission is 15% on the gross cost. The agency acts as an agent for the media. What is the revenue the agency should recognize under AS 9?

A company bills a client for advertising services. The gross media cost is ₹10,00,000 and the agency's commission is 15% on the gross cost. The agency acts as an agent for the media. What is the revenue the agency should recognize under AS 9?

1. ₹11,50,000, being the total amount billed to the client
2. ₹1,50,000, being the commission earned on the media cost (correct answer)
3. ₹10,00,000, being the gross media cost
4. ₹1,00,000, being 10% of the gross media cost

Answer: B — ₹1,50,000, being the commission earned on the media cost

Explanation. In an agency relationship, revenue is the amount of commission and not the gross inflow of cash, receivables, or other consideration. The agency does not bear the risks and rewards of the media purchase, acting merely as an agent. Therefore, the revenue is the commission of ₹10,00,000 × 15% = ₹1,50,000. The gross media cost is not the agency's revenue.

Where it goes wrong. Recognizing the gross billing amount as revenue instead of the net commission.

Authority. AS 9 para 6

Question 10 · 2 marks · Chapter 8: Revenue Based Accounting Standards · medium

Scenario. A coaching institute receives a lump-sum fee of ₹1,20,000 for a 6-month course starting 1 January 2026. The fee is non-refundable. What revenue should be recognized for the year ended 31 March 2026?

A coaching institute receives a lump-sum fee of ₹1,20,000 for a 6-month course starting 1 January 2026. The fee is non-refundable. What revenue should be recognized for the year ended 31 March 2026?

1. ₹1,20,000, as the fee is non-refundable
2. ₹60,000, based on the time proportion (correct answer)
3. Nil, as the course is incomplete
4. ₹20,000, based on the months completed

Answer: B — ₹60,000, based on the time proportion

Explanation. Tuition fees are recognized over the period of instruction. The course spans 6 months from 1 January 2026 to 30 June 2026. For the year ended 31 March 2026, 3 months have elapsed. Revenue for the year = ₹1,20,000 × (3/6) = ₹60,000. The remaining ₹60,000 is treated as unearned revenue or a liability for the next year.

Where it goes wrong. Recognizing the entire non-refundable fee immediately upon receipt.

Authority. AS 9 para 15

Question 11 · 2 marks · Chapter 8: Revenue Based Accounting Standards · hard

Scenario. A manufacturer sells a product with a 2-year warranty for ₹5,00,000. The standard warranty is for 1 year, and an extended 1-year warranty is sold separately for ₹30,000. The cost of the standard warranty is estimated at ₹15,000. How should the revenue be recognized?

A manufacturer sells a product with a 2-year warranty for ₹5,00,000. The standard warranty is for 1 year, and an extended 1-year warranty is sold separately for ₹30,000. The cost of the standard warranty is estimated at ₹15,000. How should the revenue be recognized?

1. Recognize ₹5,00,000 as product revenue and ₹30,000 as service revenue over the extended period
2. Recognize ₹5,00,000 as product revenue and create a provision of ₹45,000 for both warranties
3. Recognize ₹4,70,000 as product revenue and ₹30,000 as service revenue over the extended period (correct answer)
4. Recognize ₹5,00,000 as product revenue and ₹15,000 as service revenue over the extended period

Answer: C — Recognize ₹4,70,000 as product revenue and ₹30,000 as service revenue over the extended period

Explanation. When a product is sold with an extended warranty that is a separately priced service, the revenue from the extended warranty should be deferred and recognized over the period of the service. The total transaction price is ₹5,00,000, which includes the extended warranty. The product revenue is recognized at sale, net of the separately priced warranty. Product revenue = ₹5,00,000 - ₹30,000 = ₹4,70,000. The extended warranty revenue is recognized over the 1-year period. The standard warranty is part of the sale and is provided for as a cost.

Where it goes wrong. Recognizing the entire sale price as product revenue and treating the extended warranty as a provision.

Authority. AS 9 para 11

Question 12 · 2 marks · Chapter 8: Revenue Based Accounting Standards · medium

Scenario. An entity has an interest-bearing investment of ₹10,00,000 at 12% p.a. The interest for the quarter ending 31 March 2026 has not been received. Under AS 9, how should this interest be recognized?

An entity has an interest-bearing investment of ₹10,00,000 at 12% p.a. The interest for the quarter ending 31 March 2026 has not been received. Under AS 9, how should this interest be recognized?

1. Only when actually received
2. On a time proportion basis, taking into account the amount outstanding and the rate applicable (correct answer)
3. On an accrual basis in accordance with the terms of the relevant agreement
4. When the owner's right to receive payment is established

Answer: B — On a time proportion basis, taking into account the amount outstanding and the rate applicable

Explanation. AS 9 specifically states that interest revenue should be recognized on a time proportion basis, taking into account the amount outstanding and the rate applicable. For the quarter ending 31 March 2026, interest of ₹10,00,000 × 12% × 3/12 = ₹30,000 should be accrued.

Where it goes wrong. Recognizing interest only on a cash basis.

Authority. AS 9 para 8.1

Question 13 · 2 marks · Chapter 8: Revenue Based Accounting Standards · hard

Scenario. A company sells goods for ₹1,00,000 with a assured sale agreement, where the buyer has the right to return unsold goods after 6 months. Based on past experience, the company estimates that 10% of goods will be returned. What is the revenue to be recognized?

A company sells goods for ₹1,00,000 with a assured sale agreement, where the buyer has the right to return unsold goods after 6 months. Based on past experience, the company estimates that 10% of goods will be returned. What is the revenue to be recognized?

1. ₹1,00,000, as the sale has been executed
2. ₹90,000, based on the estimated returns (correct answer)
3. Nil, until the return period expires
4. ₹10,000, as a provision

Answer: B — ₹90,000, based on the estimated returns

Explanation. When the buyer has the right to return the goods, revenue should be recognized only if the seller can reliably estimate the returns. The company estimates 10% returns. Revenue recognized = ₹1,00,000 - ₹10,000 = ₹90,000. The estimated return of ₹10,000 is treated as a refund liability or provision.

Where it goes wrong. Recognizing the full amount and ignoring the right of return, or deferring all revenue.

Authority. AS 9 para 11

Question 14 · 2 marks · Chapter 8: Revenue Based Accounting Standards · hard

Scenario. On 1 January 2026, a company sold goods for ₹50,000. The cost of goods sold is ₹30,000. The customer paid 20% down and the balance in 4 equal annual installments. The company follows the cost recovery method for installment sales. How much revenue should be recognized in the first year?

On 1 January 2026, a company sold goods for ₹50,000. The cost of goods sold is ₹30,000. The customer paid 20% down and the balance in 4 equal annual installments. The company follows the cost recovery method for installment sales. How much revenue should be recognized in the first year?

1. ₹50,000
2. ₹10,000 (correct answer)
3. ₹20,000
4. Nil

Answer: B — ₹10,000

Explanation. Under the cost recovery method for installment sales where ultimate collection is not reasonably assured, revenue is recognized only to the extent of costs recovered. The down payment is 20% of ₹50,000 = ₹10,000. Since the cost is ₹30,000, the down payment is less than the cost. Hence, no profit is recognized, and revenue is recognized only up to the cash received, which is ₹10,000.

Where it goes wrong. Recognizing the full sale amount or the gross profit portion.

Authority. AS 9 para 10

Question 15 · 2 marks · Chapter 8: Revenue Based Accounting Standards · medium

Scenario. A company receives an advance of ₹1,00,000 for services to be rendered over the next 2 years. The company follows the accrual basis. As of the end of the first year, 60% of the services have been performed. What is the unearned revenue to be reported in the balance sheet?

A company receives an advance of ₹1,00,000 for services to be rendered over the next 2 years. The company follows the accrual basis. As of the end of the first year, 60% of the services have been performed. What is the unearned revenue to be reported in the balance sheet?

1. ₹1,00,000
2. ₹60,000
3. ₹40,000 (correct answer)
4. Nil

Answer: C — ₹40,000

Explanation. The total advance is ₹1,00,000. By the end of the first year, 60% of services are performed, so 60% of revenue (₹60,000) is recognized. The remaining unearned revenue is 40% of ₹1,00,000 = ₹40,000, which is reported as a liability in the balance sheet.

Where it goes wrong. Recognizing the entire amount or calculating the wrong percentage.

Authority. AS 9 para 15

Question 16 · 2 marks · Chapter 8: Revenue Based Accounting Standards · hard

Scenario. A company has a royalty agreement with a minimum guarantee of ₹5,00,000 per annum. The actual sales for the year are ₹80,00,000 and the royalty rate is 5%. How much royalty revenue should be recognized?

A company has a royalty agreement with a minimum guarantee of ₹5,00,000 per annum. The actual sales for the year are ₹80,00,000 and the royalty rate is 5%. How much royalty revenue should be recognized?

1. ₹5,00,000 (correct answer)
2. ₹4,00,000
3. ₹9,00,000
4. ₹80,00,000

Answer: A — ₹5,00,000

Explanation. Royalty is 5% of ₹80,00,000 = ₹4,00,000. However, the agreement has a minimum guarantee of ₹5,00,000. The company must recognize the higher of the actual royalty and the minimum guarantee. Therefore, royalty revenue = ₹5,00,000.

Where it goes wrong. Recognizing the actual calculated royalty of ₹4,00,000 and ignoring the minimum guarantee.

Authority. AS 9 para 8.2

Question 17 · 2 marks · Chapter 8: Revenue Based Accounting Standards · hard

Scenario. On 1 April 2025, a company received a grant of ₹10,00,000 for the purchase of machinery costing ₹50,00,000. The machinery has a useful life of 10 years. How should the grant be recognized in the financial statements for the year ended 31 March 2026?

On 1 April 2025, a company received a grant of ₹10,00,000 for the purchase of machinery costing ₹50,00,000. The machinery has a useful life of 10 years. How should the grant be recognized in the financial statements for the year ended 31 March 2026?

1. Recognize the entire grant as revenue in the year of receipt
2. Recognize ₹1,00,000 as revenue, matching the depreciation on the machinery (correct answer)
3. Deduct the grant from the cost of the machinery and recognize Nil revenue
4. Recognize the grant as a capital reserve

Answer: B — Recognize ₹1,00,000 as revenue, matching the depreciation on the machinery

Explanation. Under AS 9, revenue from government grants is not covered (it is covered under AS 12). However, if the grant is related to a depreciable asset, it should be recognized as income over the periods in which the asset is depreciated. Depreciation for the year is ₹50,00,000 / 10 = ₹5,00,000. The grant of ₹10,00,000 corresponds to 20% of the asset cost. Revenue recognized = 20% of ₹5,00,000 = ₹1,00,000.

Where it goes wrong. Recognizing the entire grant immediately or ignoring the amortization.

Authority. AS 12 para 8

Question 18 · 2 marks · Chapter 8: Revenue Based Accounting Standards · hard

Scenario. A company sells goods for ₹5,00,000 with a 30-day return policy. At the time of sale, the company cannot reliably estimate the returns. How should revenue be recognized?

A company sells goods for ₹5,00,000 with a 30-day return policy. At the time of sale, the company cannot reliably estimate the returns. How should revenue be recognized?

1. Recognize ₹5,00,000 and create a provision for returns
2. Recognize ₹5,00,000 because the sale is complete
3. Defer the revenue until the return period expires or returns are reliable (correct answer)
4. Recognize 50% of the revenue

Answer: C — Defer the revenue until the return period expires or returns are reliable

Explanation. When the seller cannot reliably estimate the returns, revenue should not be recognized until the return period expires or the returns can be reliably measured. Recognizing revenue would violate the prudence concept and the requirement for reliable measurement.

Where it goes wrong. Recognizing revenue despite the inability to estimate returns.

Authority. AS 9 para 11

Question 19 · 2 marks · Chapter 8: Revenue Based Accounting Standards · medium

Scenario. A company provides a 1-year standard warranty on its products. The estimated cost of warranty is 2% of sales. During the year, sales were ₹50,00,000. Actual warranty costs incurred were ₹80,000. How should the warranty be accounted for?

A company provides a 1-year standard warranty on its products. The estimated cost of warranty is 2% of sales. During the year, sales were ₹50,00,000. Actual warranty costs incurred were ₹80,000. How should the warranty be accounted for?

1. Recognize warranty expense of ₹1,00,000 and a provision of ₹1,00,000
2. Recognize warranty expense of ₹80,000 as incurred
3. Recognize warranty expense of ₹1,00,000 and reduce the provision by ₹80,000, leaving a provision of ₹20,000 (correct answer)
4. No accounting treatment is required until the warranty is claimed

Answer: C — Recognize warranty expense of ₹1,00,000 and reduce the provision by ₹80,000, leaving a provision of ₹20,000

Explanation. A standard warranty is a provision recognized when the product is sold. The estimated warranty expense is 2% of ₹50,00,000 = ₹1,00,000. The actual warranty costs incurred are ₹80,000, which reduces the provision. The remaining provision is ₹20,000.

Where it goes wrong. Expensing only actual costs or failing to create a provision.

Authority. AS 29 para 14

Question 20 · 2 marks · Chapter 8: Revenue Based Accounting Standards · hard

Scenario. A company has the following transactions: (i) Interest accrued on investments ₹10,000; (ii) Royalty accrued ₹5,000; (iii) Dividend received ₹8,000 (declared last year). What is the total revenue to be recognized in the current year under AS 9?

A company has the following transactions: (i) Interest accrued on investments ₹10,000; (ii) Royalty accrued ₹5,000; (iii) Dividend received ₹8,000 (declared last year). What is the total revenue to be recognized in the current year under AS 9?

1. ₹23,000
2. ₹15,000 (correct answer)
3. ₹13,000
4. ₹10,000

Answer: B — ₹15,000

Explanation. Interest is recognized on a time proportion basis (₹10,000). Royalty is recognized on an accrual basis (₹5,000). Dividend received was declared last year, so the right to receive was established in the prior year. It should not be recognized as revenue in the current year. Total revenue = ₹10,000 + ₹5,000 = ₹15,000.

Where it goes wrong. Including the dividend received in the current year's revenue.

Authority. AS 9 para 8