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CA Intermediate · Advanced Accounting · AS 29 (Revised) Provisions, Contingent Liabilities and Contingent Assets

Meenakshi Chemicals Ltd. has an onerous contract to supply 10,000 units at Rs 120 per unit. Unavoidable cost of fulfilling it is Rs 135 per unit. If the company cancels, it must pay compensation of Rs 11 per unit. Before the contract, no assets were dedicated to it. What provision should be recognised under AS 29 (Revised)?

The provision is Rs 1,10,000. For an onerous contract, the obligation is measured at the lower of the net cost of fulfilling it and the penalty for exiting. Fulfilling loses Rs 15 per unit, or Rs 1,50,000, while cancellation costs Rs 11 per unit, or Rs 1,10,000.

  1. ARs 1,10,000Correct
  2. BRs 1,50,000
  3. CRs 1,60,000
  4. DRs 2,60,000

Explanation

Cost of fulfilling the contract = Rs 135 - Rs 120 = Rs 15 loss per unit, i.e. Rs 1,50,000. Cost of exiting = Rs 11 per unit, i.e. Rs 1,10,000. The provision is the lower of the two, being the least net cost of exiting, so Rs 1,10,000. Rs 1,50,000 wrongly takes fulfilment loss ignoring the cheaper exit.

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