Question

Use the following information for problems #49-50. On December 4, 20X8, DoCo enters into a contractual agreement to take delivery on January 25, 20X9 of 10,000 pounds of nuts at a cost of $2.20 per pound. On December 31, 20X8, DoCo finds that the market price of the nuts has declined to $1.90 per pound, and management decides that the decline is permanent. 49. DoCo should show these developments on its 20X8 financial statements as ... a. a $22,000 liability b. a $19,000 liability c. a $3,000 liability d. no liability 50. When DoCo takes delivery on January 25, 20X9, the market price of nuts is $1.75 per pound. As a result, DoCo should... a. debit Inventory $17,500 b. debit Inventory $22,000 c. debit Loss $4,500 d. debit Retained Earnings $3,000

Answer 1

49)

The correct answer is " d) No Liability.

Supporting explanation:

Entering into a contractual agreement do not have any impact on the financial statements as nothing is recorded in the books relating to the contract entered so when the price declines permanently also there is no requirement to record it as a liability because nothing is recorded in the books at the time of entering into the contract.

Therefore, the correct option is d) No Liability.

50)

The correct answer is " c) Debit Loss $4,500".

Supporting calculations:

When the delivery taken, it will be recorded in the books on January 25th, 20X9 so after that date, if the market price declines then the loss of $4,500 ($2.20 per pound - $1.75 per pound = $0.45 per pound * 10,000 pounds) should be debited.

Therefore, the correct answer is "Debit Loss $4,500."