Attwood Woodcrafts Inc. (AWI), a publicly accountable entity, has the following contracts with its suppliers of premium raw wood: 1. Contract 1 is for the future purchase of organic cherrywood. The contract price is $11 per board metre (that is, one metre of wood), with a minimum annual purchase of 40,000 board metres. Under the terms of the contract, a penalty of $100,000 is payable if the minimum annual purchase is NOT ordered. Due to a downturn in economic conditions, AWI expects to use only 80% of the organic cherrywood in its manufacturing process this year and has NO use for any additional wood. AWI is able to resell any unused wood at 50% of its cost. AWI earns a gross margin of $3 per board metre for manufactured products. 2. Contract 2 is for the future purchase of 5,000 board metres of teakwood. The contract price is $40 per board metre. The machinery used to process the teakwood broke down early this year, and due to the specialized nature of the machinery, it is NOT able to be fixed until sometime next year. AWI has found a buyer for 2,000 board metres of the teakwood at $36 per board metre. If AWI cancels the contract, it is obligated to pay a penalty of $80,000. AWI has a December 31 year end.

Required: a) For each of the contracts, determine whether it is an onerous contract. Explain any assumptions made in the analysis and the accounting treatment required. (8 marks) b) Prepare any necessary journal entries for the current year end. Assume that the time value of money is immaterial.