An entity has a contract to purchase one million units of gas at 23p per unit, giving a contract price of 2,30,000. The current market price for a…

(i) The gas will be used to generate electricity, which will be sold at a profit. The economic benefits from the contract include the benefits to the entity of using the gas in its business and, because the electricity will be sold at a profit, the contract is not onerous. (ii) The electricity is sold to a wide range of customers. The entity first considers whether the assets used to generate electricity are impaired. To the extent that there is still a loss after the assets have been written down, a provision for an onerous contract should be recorded. (iii) The only economic benefit from the purchase contract costing - 2,30,000 are the proceeds from the sales contract, which are - 1,80,000. Therefore, a provision should be made for the onerous element of 50,000, being the lower of the cost of fulfilling the contract and the penalty cost of cancellation (55, 000).