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Practice Problem 1 (20 minutes) Llama Tech Co. (LTC) has three contracts, A, B, and C, as set out below. Contract A is for the future purchase of 2,000 tonnes of aluminum, at a price of $2,500 per tonne. The spot price at year end was $2,100 per tonne. The metal will be used to manufacture water pumps. As a result of the decline in the price of aluminum, the sales price of the pumps was reduced to $410. The costs of manufacture and other components are $220 per pump. Manufacturing one pump uses 50 kg of aluminum (1 tonne = 1,000 kg). Contract B is for the future purchase of 800 tonnes of copper, which the company had planned to use in producing bronze. The company sold its bronze manufacturing business subsequent to entering into the purchasing contract and does not have an alternative use for the copper. The contract price is $350 per tonne. At December 31, 2020, the year end of the company, the spot price was $280 per tonne. Under the terms of the contract, a cancellation fee of $80,000 is payable if delivery is not taken. Contract C is for the future purchase of 1,000 tonnes of special tin ingots, at a cost of $550 per tonne. The spot price at year end was $500 per tonne. Processing costs are $150 per tonne. The processed ingots can be sold for $650 per tonne. LTC reports using the IFRS framework. Required: Using the issue-analysis-recommendation (IAR) approach for each contract, identify which, if any, are onerous. Assume that the effect of the time value of money is immaterial. Prepare any necessary journal entries. Practice Problem 1 (20 minutes) Llama Tech Co. (LTC) has three contracts, A, B, and C, as set out below. Contract A is for the future purchase of 2,000 tonnes of aluminum, at a price of $2,500 per tonne. The spot price at year end was $2,100 per tonne. The metal will be used to manufacture water pumps. As a result of the decline in the price of aluminum, the sales price of the pumps was reduced to $410. The costs of manufacture and other components are $220 per pump. Manufacturing one pump uses 50 kg of aluminum (1 tonne = 1,000 kg). Contract B is for the future purchase of 800 tonnes of copper, which the company had planned to use in producing bronze. The company sold its bronze manufacturing business subsequent to entering into the purchasing contract and does not have an alternative use for the copper. The contract price is $350 per tonne. At December 31, 2020, the year end of the company, the spot price was $280 per tonne. Under the terms of the contract, a cancellation fee of $80,000 is payable if delivery is not taken. Contract C is for the future purchase of 1,000 tonnes of special tin ingots, at a cost of $550 per tonne. The spot price at year end was $500 per tonne. Processing costs are $150 per tonne. The processed ingots can be sold for $650 per tonne. LTC reports using the IFRS framework. Required: Using the issue-analysis-recommendation (IAR) approach for each contract, identify which, if any, are onerous. Assume that the effect of the time value of money is immaterial. Prepare any necessary journal entries
