David has a contract to buy 900 metres of cloth each month for $7 per month. From each 3 meters of cloth he can make a dress which he can sell for $30. He also incurs labour costs of $4 per dress. Alternatively he can sell the cloth immediately for $6.25 per meter. If he decides to cancel the cloth purchase contract without notice he must pay cancellation penalty of $700, for each of the next two months. In December 2009 the market price of dresses fell to $22. He is considering ceasing production since he believes that the market will not improve. There is 2 months' notice stated in the contract in case of breach of a contract. Is there a present obligation? b) What will appear in respect of the contract in David's financial statements for the year ending 31 December, 2009?

David has a contract to buy 900 metres of cloth each month for $7 per month. From each 3 meters of cloth he can make a dress which he can sell for $30. He also incurs labour costs of $4 per dress. Alternatively he can sell the cloth immediately for $6.25 per meter. If he decides to cancel the cloth purchase contract without notice he must pay cancellation penalty of $700, for each of the next two months. In December 2009 the market price of dresses fell to $22. He is considering ceasing production since he believes that the market will not improve. There is 2 months' notice stated in the contract in case of breach of a contract. Is there a present obligation? b) What will appear in respect of the contract in David's financial statements for the year ending 31 December, 2009?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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