This is one of the questions, I picked up from professional exams in UK.
Atkins plc’s operations involve selling cars to the public through a chain of retail car showrooms. It buys most of its new vehicles directly from the manufacturer on the following terms:
- Atkins plc will pay the manufacturer for the cars on the date they are sold to a customer or six months after they are delivered to its showrooms whichever is the sooner.
- The price paid will be 80% of the retail list price as set by the manufacturer at the date that the goods are delivered.
- Atkins plc will pay the manufacturer 1·5% per month (of the cost price to Atkins plc) as a ‘display charge’ until the goods are paid for.
- Atkins plc may return the cars to the manufacturer any time up until the date the cars are due to be paid for. Atkins plc will incur the freight cost of any such returns. Atkins plc has never taken advantage of this right of return.
- The manufacturer can recall the cars or request them to be transferred to another retailer any time up until the time they are paid for by Atkins plc.
Discuss which party bears the risks and rewards in the above arrangement and come to a conclusion on how the transactions should be treated by each party.
Please discuss how do you treat in the financial statements according to Indian Accounting Standards ?