Marvin Gaye Company has been having difficulty obtaining key

Marvin Gaye Company has been having difficulty obtaining key raw materials for its manufacturing process. The company therefore signed a long-term noncancelable purchase commitment with its largest supplier of this raw material on November 30, 2014, at an agreed price of $426,810. At December 31, 2014, the raw material had declined in price to $392,580. What entry would you make on December 31, 2014, to recognize these facts? Date Dec. 31 Account Titles and Explanation 1. 2. Debit? Credit?

Solution:

We will always use the fair value to price the inventory.

Contract Price - fair value = \"Loss on Purchase commitment.\"

There are fluctuations in market price even after the contract is made.So, the firm hs to take into account unrealized gains or losses.

We estimate the loss at the end of the period and use an account called \"allowance for purchase commitment\"

Journal Entry as on Dec 31, 2014:

1. Dr: Loss on Purchase commitment (Contract Price - Fair Value).....34230

Cr:....Allowance for purchase commitment (Contract Price - Fair Value).....34230

(to record estimated loss at end of the period...\"unrealized loss\")

2. Dr: Inventory (FV)....392580

Dr: Allowance for purchase commitment...34230

Cr:...Cash (Contract price) ...426810.

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Marvin Gaye Company has been having difficulty obtaining key

Solution

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