Prophet Company signed a long-term purchase contract to buy timber from the U.S. Forest Service at $300 per thousand board feet. Under these terms, Prophet must cut and pay $6,000,000 for this timber during the next year. Currently, the market value is $250 per thousand board feet. At this rate, the market price is $5,000,000. Jerry Herman, the controller, wants to recognize the loss in value on the year-end financial statements, but the financial vice president, Billie Hands, argues that the loss is temporary and should be ignored. Herman notes that market value has remained near $250 for many months, and he sees no sign of significant change.
How would the purchase commitment be treated in the financial statements?
The purchase commitment should be valued in financial statements at lower of Cost or market price.
In the given question Cost price is $6,000,000 and Market price is $5,000,000
Since market price is lower the financial statement should carry purchase commitment at $5,000,000
The controller is right in recognizing the loss in value on the year-end financial statements
Prophet Company signed a long-term purchase contract to buy timber from the U.S. Forest Service at...