Accounting · IAS 37 Provisions, Contingent Liabilities and Contingent Assets
On 1 October 20X4, Specter Co entered into a non-cancellable contract to supply specialized components to Stark Ltd for a fixed price of $1,200,000. By 31 December 20X4 (Specter Co's year-end), the estimated total cost to fulfill the contract rose to $1,500,000 due to increased material costs. The components will be delivered in March 20X5. There are no alternative uses for the components, and the penalty for non-performance is $1,000,000. Under IAS 37, what amount should Specter Co recognize in profit or loss for the year ended 31 December 20X4?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1A loss of $300,000 as a provision for an onerous contract representing a legal obligation.✓
- 2A loss of $300,000 as a provision representing a constructive obligation.
- 3A loss of $1,000,000 as a provision representing the exit penalty cost.
- 4No loss should be recognized, as the contract will be fulfilled in the next financial period.
Correct answer
A loss of $300,000 as a provision for an onerous contract representing a legal obligation.
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