Question

On October 1, 20X4, Austin Refining Corp. (ARC) entered into a non-cancellable contract to purchase 100,000...

On October 1, 20X4, Austin Refining Corp. (ARC) entered into a non-cancellable contract to purchase 100,000 barrels of WTI crude oil at $50.00 per barrel. ARC took delivery of 40,000 barrels on November 15 when the price for immediate delivery (spot price) of WTI crude oil was $48.00. ARC had not yet taken delivery of the remaining barrels by its December 31, 20X4, year end. The spot price on December 31, 20X4, was $44.00 per barrel. Refining costs are $25.00 per barrel and the refined product can be sold under contract for $72.00 per barrel. ARC uses IFRS for reporting its financial results. If the time value of money element is immaterial, what amount should ARC recognize as a provision for this contract?

a) $180,000

b) $260,000

c) $300,000

d) $360,000

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Answer #1

The correct answer is

a) $ 180000

Explaination

Amount of Proviosin required

= (cost of material + refinning costs) - Sellinfg Price) * units yet to be received

= ((50+25)-72) * (100000-40000)

= 3 * 60000

= $ 180000

So the correct answer is

a) $ 180000

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