Maroubra Ltd enters a contract to supply Lurline Bay Ltd with 20 Sandman panel vans at a sales price of $75 000 each. The expected manufacturing cost of each van is expected to be $60 000. The vans will be placed in the control of Lurline Bay Ltd once all 20 vans have been completed. When production commenced it became clear that an error had been made in determining the manufacturing cost, which was reassessed to actually be $90 000 per van.

REQUIRED

a. Determine whether the contract for the supply of the vans constitutes an ‘onerous contract’. It is assumed that the contract is ‘non-cancellable’.

b. Assume that at the end of the accounting period five vans had been completed, but not yet transferred to Lurline Bay Ltd. Lurline Bay Ltd expects Maroubra Ltd to fully complete its obligations under the contract. What is the accounting journal entry to recognise the existence of the ‘onerous contract’?

c. Assume that at the end of the accounting period, no vans had been produced but Maroubra Ltd was obliged to deliver the vans within the following six months, or alternatively, terminate the contract and pay a penalty to Lurline Bay of $250 000. What is the accounting journal entry to recognise the existence of the ‘onerous contract’?