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Hello Stephen, well done.
If a company enters into a contract with a foreign supplier to buy products at a given price say USD 500 million. At the year the company realises that it no longer required the products due to anticipation of fall in prices of the contract. It can’t cancel the contract nor selling it to another party. The contract has more five years to run. Cost of capital is 10%.
How do we do we account for this transaction in the f/s? Thanks
(Answer for exam purposes only)
Onerous contract.
Dr P&L Cr Provision – full cost of contract
Discount as obligation extends over more than one year.
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