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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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Dani Corporation signed a binding commitment on December 2 to purchase inventory for $300,000 cash on January 2. By December 31, the market price (replacement cost) of the inventory had declined to $280,000. Prepare Dani’s journal entries at year-end and at the date of purchase.

To determine

Journalize Company D’s inventory transaction at the year end and at the purchase date.

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:

DateAccount TitleDebit ($)Credit ($)
December 31Loss on Purchase Commitment$20,000  
   Accrued Loss on Purchase Commitment $20,000
 (To record the Loss on the purchase commitment)  

Table (1)

  • 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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