Cases
Practical case
Pellivar Emballages SA (a fictitious entity) manufactures thermoformed food trays. The surge in the price of resin at the end of 20X2 has eroded the profitability of several supply contracts. You are preparing the financial statements for the year ended 31 December 20X2.
Your assignment
Determine whether IAS 37 applies to the contracts and commitments described, identify the onerous contracts, calculate the cost of fulfilling, then the least net cost of exiting and the provision (fulfil or exit?), first recognising any impairment loss on the assets used in fulfilling the contract; answer the proposal to provide for the division's losses, record the entries and measure their impact.
Work on this file as you would in practice: read the situation, open the documents, sort the useful information, then carry out the work requested. The solution is revealed once you submit.
Advanced level: no help, the work is grouped by kind.
Document 1
Document 5
5 documents: open each one to read it.
Document 1Contract
Contract signed on 1 March 20X2 with Narvelle Distribution (a fictitious entity), a customer of Pellivar. Pellivar must deliver in 20X3 the remaining 3,000,000 trays at the fixed price of 0.40 each, i.e. 1,200,000 to be invoiced. Pellivar can terminate the contract only by paying a lump-sum indemnity equal to 125% of the price still to be invoiced, i.e. 1,500,000, intended to cover the customer's replacement sourcing costs.
The figures of the documents, gathered for your work.
| Item | Value | Found in |
|---|---|---|
| Date of signature of the contract | March 1 20X2 | |
| Trays still to be delivered | 3,000,000 units | |
| Fixed unit price | €0.40 | |
| Price still to be invoiced (economic benefits expected) | €1,200,000.00 | |
| Termination indemnity payable by Pellivar | €1,500,000.00 | |
| Resin cost per tray | €0.31 | |
| Resin (direct materials) | €930,000.00 | |
| Direct labour | €270,000.00 | |
| Energy consumed by thermoforming | €60,000.00 | |
| Depreciation of line T4 in 20X3 | €300,000.00 | |
| Share of line T4 machine hours planned for Narvelle | 25% | |
| Depreciation of the dedicated mould after impairment | €10,000.00 | |
| Share of head-office costs | €48,000.00 | |
| Sales department costs | €12,000.00 | |
| Carrying amount of the dedicated mould | €70,000.00 | |
| Recoverable amount of the dedicated mould (IAS 36) | €10,000.00 | |
| Division's expected operating loss in 20X3 | €400,000.00 | |
| Price still to be invoiced (Ilbaro) | €500,000.00 | |
| Budgeted incremental costs (Ilbaro) | €380,000.00 | |
| Allocated share of line T4 (Ilbaro) | €45,000.00 | |
| Launch budget for the compostable range | €220,000.00 | |
| Launch date | January 15 20X4 |
Not every document matters: identify those that affect the accounting treatment.
Part 1 · Classification · Analysis
Sort each document: does it affect the accounting treatment?
Drag each item into its category, or tap the category under the item.
Narvelle Distribution supply contract
Production budget for the Narvelle deliveries
Financial controller's memo
Ilbaro Frais supply contract
Marketing memo on the compostable range
8 tasks in the order of the file. Calculations, entries and effects on the financial statements are marked; written answers are self-assessed against the solution.
Task 1Analysis
Which contracts and commitments fall within IAS 37? Can the division's expected loss be provided for?
Task 2Calculation
Calculate the cost of fulfilling the Narvelle and Ilbaro contracts.
Part 1 · Calculation
Calculate the cost of fulfilling the Narvelle and Ilbaro contracts.
Result: Cost of fulfilling the Ilbaro contract
Task 3Calculation
Is the Narvelle contract onerous? Determine its net cost of fulfilling and its least net cost of exiting: is it better to fulfil it or to exit?
Part 1 · Calculation
Is the Narvelle contract onerous? Determine its net cost of fulfilling and its least net cost of exiting: is it better to fulfil it or to exit?
Result: Least net cost of exiting the Narvelle contract
Task 4Journal entries
Calculate and recognise the impairment loss on the dedicated mould.
Part 1 · Calculation
Calculate and recognise the impairment loss on the dedicated mould.
Part 2 · Journal entry · Journal entries
Entry 1 of 1
One line = one account and one side. Add a line if the entry needs more; the balance check updates live.
Line 1
Line 2
Task 5Calculation
Calculate the onerous contract provision and the headroom of the Ilbaro contract.
Part 1 · Calculation
Calculate the onerous contract provision and the headroom of the Ilbaro contract.
Result: Excess of benefits over the cost of fulfilling (Ilbaro)
Task 6Journal entries
Recognise the onerous contract provision.
Part 1 · Journal entry · Journal entries
Entry 1 of 1
One line = one account and one side. Add a line if the entry needs more; the balance check updates live.
Line 1
Line 2
Task 7Effects on the financial statements
What is the impact of these entries on the financial statements at 31 December 20X2?
Part 1 · Classification · Analysis
State the direction of the effect on each financial statement aggregate.
Financial position (balance sheet)
Profit or loss
Other comprehensive income
Equity
Part 2 · Calculation · Analysis
Quantify the effect on the aggregates concerned.
Result: Amount of the effect — Equity
Task 8Conclusion
Write the conclusion and answer the chief financial officer's proposals.
Your working draft for this file: points noted, leads, intermediate calculations.
Saved on this device only; never graded.
Complete every item of the file to submit it (0 / 11).
Document this file
These working papers use the data and results of this case.
Normative references