MAY 2010 - Final (New Course) Group 1 - Paper 1

 Sun Ltd. has entered into a sale contract of Rs. 5 crores with X Ltd. during2009-10 financialyear. The profit on this transactionis Rs. 1 cr.ore. Thedelivery of goods to take place during the first month of 2010-11 financialyear. In case of failure of Sun Ltd. to deliver within the schedule a compensationof Rs. 1.5 crore is to be paid to X Ltd. Sun Ltd. planned to manufacturethegoods during the last month of the 2009-10 financial year. As on BalanceSheet date (31.3.20lO), the goods were not manufacturedand it was unlikelythat Sun Ltd. will be in a position to meet the contractualobligation.

(i) Shpuld Sun Ltd. provide for contingency as per AS-29 ?

(ii) Should provision is measuredas the excess of compensationto be paidover the profit?