Question

E9.12  

(LO 3 ) (Purchase Commitments) At December 31, 2020, Indigo Girls Company has outstanding noncancelable purchase commitments for 36,000 gallons, at $3.00 per gallon, of raw material to be used in its manufacturing process. The company prices its raw material inventory at cost or market, whichever is lower.

Instructions

a.  

Assuming that the market price as of December 31, 2020, is $3.30, how would this matter be treated in the accounts and statements? Explain.

b.  

Assuming that the market price as of December 31, 2020, is $2.70, instead of $3.30, how would you treat this situation in the accounts and statements?

c.  

Give the entry in January 2021, when the 36,000-gallon shipment is received, assuming that the situation given in (b) above existed at December 31, 2020, and that the market price in January 2021 was $2.70 per gallon. Give an explanation of your treatment.

Answer 1

Answer:

a.) No Journal entry required because cost of $3.00 per unit is lower than market price of $3.30 per unit

b.)

Date	Accounts Titles and Explanation	Debit ($)	Credit ($)
31-Dec-2020	Unrealized loss (36000*(3-2.7)	$10,800
	Estimated purchase commitment liability		$10,800
	(To record the unrealized loss)

c.)

Date	Accounts Titles and Explanation	Debit ($)	Credit ($)
Jan-2021	Purchase (36000*2.7)	$97,200
	Estimated purchase commitment liability	$10,800
	Accounts payable		$108,000
	(To record the purchases)