ACCA Strategic Professional · Strategic Business Reporting (International) · The applications, strengths and weaknesses of the accounting framework
Dalton Co has a contract to buy a machine in six months. The contract is not yet performed by either side, and Dalton can cancel it by paying a small penalty. A director argues that Dalton should recognise a liability now for the full purchase price. Applying the Conceptual Framework's definition of a liability, which statement is most appropriate?
No liability for the full price should be recognised. A liability needs a present obligation to transfer an economic resource arising from a past event. The contract is unperformed and Dalton can escape by paying only a small penalty, so only that penalty could represent a present obligation.
- AA liability for the full price should be recognised because a past contract exists.
- BA liability should be recognised only when the machine is paid for in cash.
- CA liability for the full price should be recognised because the machine will give future economic benefits.
- DNo liability for the full price exists, because the obligation arises from an unperformed contract and Dalton can avoid it by paying only the small penalty.Correct
Explanation
A liability is a present obligation to transfer an economic resource as a result of past events. In an executory contract, Dalton has not yet received the machine and can avoid the transfer except for the penalty, so only the penalty could be an obligation. Option A ignores the lack of a present obligation for the full price. Option C confuses an asset's benefits with a liability.
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