Paxton Co. signed contracts for the purchase of raw materials to be executed the following year at a firm price of $5 million. The market price of the materials dropped to $3 million on December 31. What amount should Paxton record as an estimated liability on purchase commitments as of December 31?

Question

Business

Conrad Harris

14 March, 14:47

Paxton Co. signed contracts for the purchase of raw materials to be executed the following year at a firm price of $5 million. The market price of the materials dropped to $3 million on December 31. What amount should Paxton record as an estimated liability on purchase commitments as of December 31?

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Allen Arroyo · Answer 1

Accrued Loss on Purchase Commitments $2,000,000

Explanation:

December 31, (recognition of loss on purchase commitments)

Dr Loss on Purchase Commitments account 2,000,000 Cr Accrued Loss on Purchase Commitments account 2,000,000

Since the price of raw materials lowered by 2,000,000, the company lost money on its purchase commitments:

Purchase commitments loss = contracted price - market value = $5,000,000 - $3,000,000 = $2,000,000

The loss on purchase commitments is an expense, and accrued loss on purchase commitments is a liability.