DEF Inc Entered into a Non-Cancellable Commitment to Purchase Raw Materials

question 151

Multiple Choice

DEF Inc. entered into a non-cancellable commitment to purchase raw materials in the amount of $30,000 on December 31^st, 2010. Replacement cost was estimated at $25,000 on November 30^th, 2010 and this amount was not expected to change. Which of the following statements is correct?

• A) This is an onerous contract. A loss must be accrued in the amount of $5,000.
• B) This is not an onerous contract. A loss must be accrued in the amount of $5,000.
• C) This is an onerous contract. However, the $5,000 loss should only be disclosed in the financial statements and not accrued.
• D) This is not an onerous contract.

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