During the current year, the Guileman Manufacturing Company signed a noncancelable contract to purchase 1,000 lbs. of a raw material at $32 per lb. during the forthcoming year. On December 31, the market price of the raw material is $26 per lb., and the selling price of the finished product is expected to decline accordingly. The financial statements prepared for the year should report ... A. An appropriation of retained earnings for $6,000. B. A loss of $6,000 in the income statement. C. Nothing regarding this matter. D. A note describing the expected loss on the purchase commitment.

Question

Business

Jay Lester

25 December, 23:30

During the current year, the Guileman Manufacturing Company signed a noncancelable contract to purchase 1,000 lbs. of a raw material at $32 per lb. during the forthcoming year. On December 31, the market price of the raw material is $26 per lb., and the selling price of the finished product is expected to decline accordingly. The financial statements prepared for the year should report ... A. An appropriation of retained earnings for $6,000. B. A loss of $6,000 in the income statement. C. Nothing regarding this matter. D. A note describing the expected loss on the purchase commitment.

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Answers (1)

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Judith Lucero · Answer 1

B) A loss of $6,000 in the income statement.

Explanation:

The appropriate journal entry should be:

December 31 (recognition of loss on purchase commitments)

Dr Loss on Purchase Commitments account 6,000 Cr Accrued Loss on Purchase Commitments account 6,000

Since the price of raw materials lowered by $6,000, the company lost money on its purchase commitments:

Purchase commitments loss = contracted price - market value = $32,000 - $26,000 = $6,000

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