Question

Pino Inc. is a BC based wine producer. In anticipation of a particularly bounteous grape harvest and a potential problem in obtaining a sufficient volume of shipping crates, Pino entered into a noncancellable agreement with Lumber Products Ltd. to supply 200,000 wooden crates at a price of $24 per crate plus 7% PST and 5% GST.

During the current fiscal year, Pino purchased 50,000 crates.

Near the end of the year, however, a restrictive tariff on the import of crates from the United States was lifted. Crates then became readily available from other suppliers for only $18 plus tax.

 

Required:

1. Prepare the journal entry to record the purchase of crates during the current fiscal year.

2. Prepare the journal entry to record the impact of the price drop. What conditions are necessary for Pino to recognize a loss on the contract?

Answer 1

Requirement 1 

To record the purchase of 50,000 crates @ $24:

 

            Crate Inventory (including 7% PST).................................        1,284,000

            GST payable ($1,200,000 × 5%).......................................              60,000

                     Accounts payable.....................................................          1,344,000

 

Requirement 2 

The potential loss on the onerous contract is

($24 x $1.07) – (18 x 1.07) = $6.42 × 150,000 = $963,000:

 

            Estimated loss on onerous purchase contract..................       963,000

                Provision for onerous contract.................................             963,000

 

The provision could also be recorded before sales tax, at $900,000.

 

The loss must be likely and material, and reasonably measurable. The contract must be not subject to cancellation or renegotiation.

 

Therefore, this loss should be recorded only if  the low price of the crates is expected to continue throughout the fiscal period and the supplier refuses to renegotiate the contract.

Therefore, this loss should be recorded only if  the low price of the crates is expected to continue throughout the fiscal period and the supplier refuses to renegotiate the contract.