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Intermediate Accounting: Reporting...

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

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Loss on Purchase Commitment During 2019, Boge Corporation signed a noncancelable contract to purchase 10,000 bushels of soybeans at $5 per bushel with delivery to be made in 2020. On December 31, 2019, the price of soybeans had fallen to $4.50 per bushel. On May 1, 2020, Boge takes delivery of the soybeans when the price is $4.75 per bushel.

Required:

Prepare the journal entries required on December 31, 2019, and May 1, 2020.

To determine

Journalize the entries required on December 31, 2019 and May 1, 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 transactions of Company N:

DateAccount title and ExplanationPost ref.Amount
DebitCredit
2019    
December 31 Loss on purchase commitment $5,000 
     Accrued loss on purchase commitment  $5,000
 (To record the loss on purchase under non-cancelable purchase obligation )   
     
2020    
May 01Accrued loss on purchase commitment $2,500 
 Recovery of Accrued loss on purchase commitment   $2,500
 (To record the recovery of loss from the purchase obligation)   
     
May 01Inventory $47,500 
 Accrued loss on purchase commitment $2,500 
 Accounts payable  $50,000
 (To record the purchase of soybeans under purchase obligation)   

Table (1)

December 31, 2019: To record the loss on purchase under non-cancelable purchase obligation:

  • Loss on purchase commitment (component of retained earnings) decreases the retained earnings...

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