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5 May, 02:39

During Year 4, R Corp., a manufacturer of chocolate candies, contracted to purchase 100,000 pounds of cocoa beans at $1.00 per pound, with delivery to be made in the spring of Year 5. Because a record harvest is predicted for Year 5, the price per pound for cocoa beans had fallen to $.80 by December 31, Year 4. Of the following journal entries, the one that would properly reflect in Year 4 the effect of the commitment of R Corp. to purchase the 100,000 pounds of cocoa is:

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  1. 5 May, 04:31
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    December 31, Year 4 (recognition of loss on purchase commitments)

    Dr Loss on Purchase Commitments account 20,000 Cr Accrued Loss on Purchase Commitments account 20,000

    Explanation:

    Since the price of cocoa beans lowered by 20%, the company lost money on its purchase commitments:

    Purchase commitments loss = contracted price - market value = $100,000 - $80,000 = $20,000

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