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?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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![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.
a. 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?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Ff60d38cc-277b-489d-b72a-413c048feb88%2Fd9ba667c-cdcb-4901-8dba-2638405a7bc4%2F87zg5i8_processed.jpeg&w=3840&q=75)
Transcribed Image Text: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.
a. 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?
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