Rich Mnizi $($Pty$)$ Ltd $($hereafter $"$RM$")$ is a well$-$established company that manufactures trendy fashionable clothing, including both a women's and men's range, to be sold at a local market that is open every Saturday in Braamfontein. RM has a $30$ April year$-$end.

The company has become increasingly aware of their need to align the company values with good corporate governance and social development. As a result of this, RM has a long standing agreement with Oceana Clothing $($Pty$)$ Ltd $($hereafter $"$OC$"),$ a charity shop, to provide any unsold stock at the end of the season at a discount. The sale to OC occurs at the beginning of the next season.

OC is extremely reliant on the proceeds from the sale of RM products because the brand name is so popular and stock can be sold at a reasonable price. On $1$ May $2023$ RM signed the annual sales agreement with OC that stipulated that RM will sell to OC any unsold stock at $\backslash (70\backslash \%\backslash )$ of its original cost. In the event that the total sale proceeds of the inventory sold to OC is less than R$150000,$ RM agreed to donate the difference in cash to the orphanage that OC supports.

You extracted the following summary production and sales forecast for $2024$ from the management accounts:

$*$RM expects to sell $\backslash (\backslash$mathbf$\{86\backslash \%\}\backslash )$ of all stock produced at the local market in Braamfontein. You may assume inventory is measured using a first$-$in$-$first$-$out $($FIFO$)$ basis,

The management of RM is unsure whether the sales agreement with OC should be accounted for as an onerous contract and what affect it will have on the measurement of its unsold inventory at $30$ April $2024.$

Additional information

$-$ Assume that RM$\text{'}$s expectation of the cost of production and sales schedule is the same as the actual results achieved.

$-$ Assume that one 'season' is the same as the financial year.

$-$ Time value of money is not material.

$-$ Disregard any tax consequences including VAT.

$-$ Round all figures to the nearest Rand value.

REQUIRED

$2\mathrm{.}1)$ Discuss the whether the sales agreement entered into with Oceana Clothing $($Pty$)$ Ltd

should be accounted for as an onerous contract and what affect, if any, it might have on the measurement of inventory in the financial statements of Rich Mnizi $($Pty$)$ Ltd for the financial year ended $30$ April $2024.$ Your answer should be supported by the necessary calculations. You may exclude presentation and disclosure from your discussion.

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