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JUNAID Limited has a contract to buy 1,000 Kilograms of copper from a China Co each
month for Rs. 3,000 per Kilograms. From each Kilogram of copper JUNAID Limited make
one role of cable. The company also incurs labor and other direct variable costs of Rs.
1,000 per role. Usually company can sell each role of cable for Rs. 4,500 but in late July
2009 the market price falls to Rs. 3,500 per role. The company is considering ceasing
production since it thinks that the market may not improve. If the company decides to
cancel the copper purchase contract without 2 months’ notice it must pay a cancellation
penalty of Rs 150,000 for each of the next two months.
(05)
Required:
Discuss the Accounting treatment of the above situations.This is almost identical to the onerous contract question within the course notes on provisions and contingencies. Follow that example and see if you cannot work out the answer for yourself. If you are still having problems with it, post again and I’ll explain it to you.
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