Primero Ltd enters a contract to supply Tercer Ltd with 20 campervans at a sales price of $150 000 each. The expected manufacturing cost of each campervan is $120 000. The campervans will be placed in the control of Tercer Ltd once all 20 vans have been completed. When production commenced it became clear that an error had been made in determining the manufacturing cost, which was reassessed to actually be $180 000 per campervan.

Required

(a) Assume that at the end of the accounting period, 5 campervans had been completed, but not yet transferred to Tercer Ltd. Tercer Ltd expects Primero Ltd to fully complete its obligations under the contract. What is the accounting journal entry to recognise the existence of the ‘onerous contract’?

(b) Assume that at the end of the accounting period, no campervans had been produced, but Primero Ltd was obliged to deliver the campervans within the following six months, or alternatively, terminate the contract and pay a penalty to Tercer Ltd of $500 000. What is the accounting journal entry to recognise the existence of the ‘onerous contract’? Justify your answer.