Question

Accounting for Inventory Transactions with Purchase Commitments The following data is from Sonic Inc. Nov. 1, 2020 Sonic Inc. entered into a purchase contract (not subject to revision or cancellation) to purchase 16,000 units of inventory at $7 per unit (to be used in manufacturing). The contract period extends through February 2021, and Sonic applies a perpetual inventory system and the FIFO inventory method. Dec. 31, 2020 At Sonic's December 31 year-end, inventory was being sold at a price of $5 per unit. Jan, 25, 2021 Sonic purchased the 16,000 units contracted; however, the selling price per unit of inventory on this date was $4.75, Prepare any necessary journal entries or disclosures on the following dates. a. November 1, 2020 (initiation of contract). b. December 31, 2020 (reporting period). c. January 25, 2021 (purchase date). • Note: The selling prices above are net of selling costs. • Note: If a line in a journal entry isn't required for the transaction, select "N/A" as the account name and leaver the Dr. and Cr.answers blank (zero) Account Name Dr. Cr. Ref. Date a. Nov. 1, 2020 b. Dec. 31, 2020 c. Jan 25, 2021 Materials Inventory Loss on Purchase Contract Check

Answer 1

Answer :

a) Nov 1, 2020 : N/A

(No Journal entry required, since there is merely a contractual agreement, no financial transaction has taken place)

b)  Dec 31, 2020 :

Loss on Purchase Contract A/c …… Dr. $32,000

                To Purchase Contract Liability A/c Cr.         $32,000

(Being loss recognized on purchase commitments @ $2 per unit ($7 commitment price - $ 5 current selling price) for 16,000 units)

c)  Jan 25, 2021 :

Materials Inventory A/c …………….. Dr. $76,000

Purchase Contract liability A/c …….. Dr. $32,000

Loss on Purchase Contract A/c …… Dr. $ 4,000

                To Accounts Payable A/c Cr.                   $112,000

(Being Material Purchased recognized at $ 4.75 per unit for 16,000 units, further loss recognized on purchase commitments @ $0.25 per unit ($5 last selling price price - $ 4.75 current selling price) for 16,000 units, Contract Liability loss previously recognized at $ 32,000 now transferred to Accounts Payable)