ACCA FR · Chapter 8 · Question 10 of 10
Sora Co has a non-cancellable contract to supply goods. The unavoidable costs of fulfilling the contract are $500,000, and the revenue receivable is $380,000. Sora Co could exit the contract by paying a penalty of $150,000. What provision should be recognised for this onerous contract?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) $120,000
Explanation
For an onerous contract, the provision is the unavoidable cost, meaning the lower of the net cost of fulfilling the contract and the cost of exiting it. Net cost of fulfilling = $500,000 - $380,000 = $120,000. Penalty to exit = $150,000. Provision = lower amount = $120,000.
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