Upon inception in 2019, AVX Corp. (AVX) set up its business in a small office building in Toronto and entered into an agreement with Executive Furniture Inc. to purchase office furniture for the building on a month-by-month basis (two sets of furniture per month), with the expectation that AVX would be hiring two new employees each month on average. As AVX experienced considerable growth throughout 2020, it hired 25 additional employees at the same time, and its office building was NO longer sufficient to meet its needs. On December 15, 2020, AVX moved out of its original office building and into a new, larger office. Due to configurations in the new office, AVX had to purchase a different type of office furniture (including stand-up desks) for all of its employees. AVX has been trying to negotiate with Executive Furniture Inc. to get out of the original purchase agreement, which requires AVX to pay $4,000 per month at the beginning of each month until December 2022, since AVX has NO use for the original furniture. The original purchase agreement does NOT allow AVX to cancel the agreement prior to December 2022 under any circumstances. AVX reports according to IFRS. Required: Determine whether the agreement with Executive Furniture Inc. is an onerous contract from AVX’s perspective. Explain the financial statement impact, if any, of the agreement at December 31, 2020.
Upon inception in 2019, AVX Corp. (AVX) set up its business in a small office building in Toronto and entered into an agreement with Executive Furniture Inc. to purchase office furniture for the building on a month-by-month basis (two sets of furniture per month), with the expectation that AVX would be hiring two new employees each month on average. As AVX experienced considerable growth throughout 2020, it hired 25 additional employees at the same time, and its office building was NO longer sufficient to meet its needs.
On December 15, 2020, AVX moved out of its original office building and into a new, larger office. Due to configurations in the new office, AVX had to purchase a different type of office furniture (including stand-up desks) for all of its employees.
AVX has been trying to negotiate with Executive Furniture Inc. to get out of the original purchase agreement, which requires AVX to pay $4,000 per month at the beginning of each month until December 2022, since AVX has NO use for the original furniture. The original purchase agreement does NOT allow AVX to cancel the agreement prior to December 2022 under any circumstances.
AVX reports according to IFRS.
Required:
- Determine whether the agreement with Executive Furniture Inc. is an onerous contract from AVX’s perspective.
- Explain the financial statement impact, if any, of the agreement at December 31, 2020.
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