MC Question 23

The following scenario relates to questions 21–25.

At a board meeting in June 20X3, Neutron Co’s directors made the decision to close down one of its factories by
30 September 20X3 and market both the building and the plant for sale.

The decision had been made public, was communicated to all affected parties and was fully implemented by 30 September 20X3.

The directors of Neutron Co have provided the following information relating to the closure:
Of the factory’s 250 employees, 50 will be retrained and deployed to other subsidiaries within the Neutron group during
the year ended 30 September 20X4 at a cost of $125,000.

The remainder accepted redundancy at an average cost of $5,000 each.

The factory’s plant had a carrying amount of $2·2 million, but is only expected to sell for $500,000, incurring $50,000
of selling costs. The factory itself is expected to sell for a profit of $1·2 million.

The company also leased a number of machines in the factory which have an average of three years to run after
30 September 20X3.

The present value of these future lease payments at 30 September 20X3 was $1 million, however, the lessor has stated that they will accept $850,000 if paid on 30 October 20X3 as a full settlement.

Penalty payments, due to the non-completion of supply contracts, are estimated to be $200,000, 50% of which is
expected to be recovered from Neutron Co’s insurers.

What is the employee cost associated with the closure and sale of Neutron Co’s factory which should be charged
to profit or loss for the year ended 30 September 20X3?

A     $125,000
B     $1,250,000
C     $1,125,000
D     $1,000,000

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