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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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During 2019, R Corp., a manufacturer of chocolate candies, contracted to purchase 100,000 pounds of cocoa beans at $1.00 per pound, delivery to be made in the spring of 2020. Because a record harvest is predicted for 2020, the price per pound for cocoa beans had fallen to $0.80 by December 31, 2019.

Of the following journal entries, the one that would properly reflect in 2019 the effect of the commitment of R Corp. to purchase the 100,000 pounds of cocoa is:

Chapter 7, Problem 3MC, During 2019, R Corp., a manufacturer of chocolate candies, contracted to purchase 100,000 pounds of

To determine

Identify journal entry that reflects the commitment of Company R in 2019.

Explanation

Purchase obligation:

The situation where a company commits to purchase goods on a future date at a fixed price is referred to as the purchase obligation.

Journalize the entries for the year end:

c.Account TitleDebit ($)Credit ($)
Loss on Purchase Commitment$20,000  
   Accrued Loss on Purchase Commitment $20,000
 (To record the Loss on the purchase commitment)  
  • Loss on Purchase Commitment account is a loss and reduces the stockholder's equity. Hence, the Loss on Purchase Commitment account is debited.
  • Accrued Loss on Purchase Commitment is an increased liability and it is credited...

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