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Plz help!

Abhishek (N/A) (24 Points)

25 February 2013

I am auditing accounts for a MBA institute which is run under a charitable trust for FY 2011-12. The institute expelled 9 students due their misconduct in the institute premise. The students together filed a writ petition for refund of their fees. They had paid the fees in FY 2010-11 of around Rs.250000. The court ordered refund of Rs.150000 has lumpsum payment to each student. How should this payment be shown in the Income & Expenditure Account?

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2 Replies

CA Harish Negi (Never Say Die) (860 Points)
Replied 25 February 2013

No change in accounts of F.Y 10-11 in which you offrered 2.5 Lacs as income. Accounting Standards are applicable to the above concern. Please check AS -3 & 4. In the year 11-12 debit the account as " REFUND OF FEE" with adequate disclosures required by AS. Accordignly check for tax treatment as " APPLIED INCOME".

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shivam gupta (Student) (142 Points)
Replied 26 February 2013

Dear Abhishek,

Litigation Settlement A/c Dr. (150000 x 9)

To Bank (150000 x 9)

As told by Narish singh Negi that "Refund of Fee " A/c should be debited , which is wrong because Co. have lost a petition in which they to pay the claims to the Plantiff. If we Debit the "Refund of Fees " A/c then it may be construed that it's a Refund in the nature of Normal business which will be misleading to the Reader of the Financial Statement that is why the entry should be aforesaid mentioned should be passed & then Transfer it to P&L A/c)

& Remember show it on the Face of the P&L A/c under the head of "Exceptional Items" (Revised Schedule VI)

As per AS 5 ,when Income & Expenses in profit & Loss from Ordinary activities are of such size & nature that their non- disclosure will mislead the financial Instrument although it is from Ordinary activities of the co, seperate disclosure is required.

Litigation Settlement is one of those type of Income & Expense (For more detail Refer AS 5)