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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Definitions:

Premium

A payment to an insurance company in return for the promise to pay a claim in certain states of the world.

Insurance Company

A business entity that provides financial protection and compensation for losses to individuals and entities in exchange for premium payments.

Medical Bills

Expenses incurred for receiving medical treatment and health services.

Expected Value

In reference to a random variable, the weighted average of all possible values, where the weights on each possible value correspond to the probability of that value occurring.