During 2014, Larue Co., a manufacturer of chocolate candies, contracted to purchase 200,000 pounds of cocoa beans at $4.00 per pound, delivery to be made in the spring of 2015. Because a record harvest is predicted for 2015, the price per pound for cocoa beans had fallen to $3.30 by December 31, 2014. Of the following journal entries, the one which would properly reflect in 2020 the effect of the commitment of Crane Co. to purchase the 249000 pounds of cocoa isCocoa Inventory 971100 Accounts Payable 971100Cocoa Inventory 809250 Loss on Purchase Commitments 161850 Accounts Payable 971100Unrealized Holding Gain or Loss-Income 161850 Estimated Liability on Purchase Commitments 161850No entry would be necessary in 20214

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Business

Larry Allen

13 May, 02:20

During 2014, Larue Co., a manufacturer of chocolate candies, contracted to purchase 200,000 pounds of cocoa beans at $4.00 per pound, delivery to be made in the spring of 2015. Because a record harvest is predicted for 2015, the price per pound for cocoa beans had fallen to $3.30 by December 31, 2014. Of the following journal entries, the one which would properly reflect in 2020 the effect of the commitment of Crane Co. to purchase the 249000 pounds of cocoa isCocoa Inventory 971100 Accounts Payable 971100Cocoa Inventory 809250 Loss on Purchase Commitments 161850 Accounts Payable 971100Unrealized Holding Gain or Loss-Income 161850 Estimated Liability on Purchase Commitments 161850No entry would be necessary in 20214

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Barbara Frey · Answer 1

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During 2020, Larue Co., a manufacturer of chocolate candies, contracted to purchase 249000 pounds of cocoa beans at $3.90 per pound, delivery to be made in the spring of 2021. Because a record harvest is predicted for 2021, the price per pound for cocoa beans had fallen to $3.25 by December 31, 2020.

Of the following journal entries, the one which would properly reflect in 2020 the effect of the commitment of Crane Co. to purchase the 249000 pounds of cocoa is

Cocoa Inventory 971100

Accounts Payable 971100

Cocoa Inventory 809250

Loss on Purchase Commitments 161850

Accounts Payable 971100

Unrealized Holding Gain or Loss-Income 161850

Estimated Liability on Purchase Commitments 161850

No entry would be necessary in 2020

The correct option is the given below:

Unrealized Holding Gain or Loss-Income $161,850 Estimated Liability on Purchase Commitments $161,850

Explanation:

Apparently, Larue Co. has committed itself to buying the 249,000 pounds of cocoa in a legal agreement, hence the company is exposed to risk of any moment in the price of cocoa before the delivery date.

As a result, as at 31st December 2020, the company needs to compare the contracted price of $3.90 per pound to the current price reality in the market place.

Information gathered shows that price per would most likely $3.30, this means that the company should recognize the losses in its books.

Unrealized losses = ($3.90-$3.25) * 249,000=$161,850

This would debited to Unrealized Holding Gain or Loss-Income and credited to Estimated Liability on Purchase Commitments $161,850