Question # 6Silliun Ltd. entered in to a contract to perform certain services.1. The total contract price is Rs. 80,000.2. The estimated costs of fulfilling these contractual obligations havebeen recently re-assessed to be Rs. 140,000. No work has yet beendone.3. A penalty of Rs. 30,000 is payable if the contract is to be cancelled.Required: Process the required journal entry

The situation described indicates that Silliun Ltd. has entered into a contract that is now expected to result in a loss. In accounting, this is referred to as an onerous contract. An onerous contract is a contract in which the total cost to fulfill the obligations under the contract is higher than the economic benefit expected to be received from it.

Here are the steps to process the required journal entry:

Step 1: Identify the amount of the expected loss. In this case, the expected loss is the difference between the estimated cost of fulfilling the contract and the contract price. So, Rs. 140,000 (estimated cost) - Rs. 80,000 (contract price) = Rs. 60,000.

Step 2: Record the expected loss in the books of accounts. The journal entry would be:

Debit: Loss on Onerous Contract Rs. 60,000 Credit: Provision for Onerous Contract Rs. 60,000

This journal entry recognizes the expected loss from the contract in the financial statements of Silliun Ltd. The debit to "Loss on Onerous Contract" records the loss in the income statement, reducing the company's profit. The credit to "Provision for Onerous Contract" creates a liability in the balance sheet, representing the company's obligation to bear this loss.

Please note that the penalty of Rs. 30,000 for cancelling the contract is not considered in this journal entry. This is because the question does not indicate that Silliun Ltd. intends to cancel the contract. If the company decides to cancel the contract, the penalty would be recorded as an additional expense.

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