X and Y entered into a binding agreement on 20.12.2005 which provided for the sale of an asset (book value ₹ 2,50,000) for ₹ 3,70,000 to Y. The sale deed was to be registered and other formalities were completed on 15.1.2006. Y has paid an advance money of ₹ 50,000 to X on 20.12.2005. X and Y prepare final accounts on December 31 every year and present in April next. How the transaction is shown in the books of X and Y for the year 2005.
Question
X and Y entered into a binding agreement on 20.12.2005 which provided for the sale of an asset (book value ₹ 2,50,000) for ₹ 3,70,000 to Y. The sale deed was to be registered and other formalities were completed on 15.1.2006. Y has paid an advance money of ₹ 50,000 to X on 20.12.2005. X and Y prepare final accounts on December 31 every year and present in April next. How the transaction is shown in the books of X and Y for the year 2005.
Solution
In the books of X for the year 2005:
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X will record the receipt of the advance money from Y. This will be shown as a liability in X's books because it is an obligation to deliver the asset to Y in the future. The entry will be:
Debit: Bank/Cash Account ₹ 50,000 Credit: Advance from Y Account ₹ 50,000
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The agreement of sale does not affect the book value of the asset in X's books. The asset will continue to be shown at its book value of ₹ 2,50,000 until the sale is completed in 2006.
In the books of Y for the year 2005:
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Y will record the payment of advance money to X. This will be shown as an asset in Y's books because it represents the right to receive the asset from X in the future. The entry will be:
Debit: Advance to X Account ₹ 50,000 Credit: Bank/Cash Account ₹ 50,000
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The agreement of sale does not affect the recognition of the asset in Y's books. The asset will only be recognized when the sale is completed in 2006.
In both cases, the final accounts for the year ending December 31, 2005, will only reflect the advance money transaction. The sale of the asset will be recorded in the 2006 accounts when the sale deed is registered and other formalities are completed.
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