Question

At December 31, 2017, Indigo Girls Company has outstanding noncancelable purchase commitments for 36,000 gallons, at $3.00 per gallon, of raw material to be used in its manufacturing process. The company prices its raw material inventory at cost or market, whichever is lower.A.) Assuming that the market price as of December 31, 2017, is $2.70, record the journal entry. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.B.)Give the entry in January 2018, when the 36,000-gallon shipment is received, assuming that the situation given in (b2) above existed at December 31, 2017, and that the market price in January 2018 was $2.70 per gallon. Prepare the journal entry for when the materials are received in January 2018. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.

Answer 1

Answer:

The journal entries are as follows:

(i) On December 31, 2017

Unrealized gain or loss income A/c             Dr. $10,800

To estimated purchase commitment liability                    $10,800

(To record other income and expenses)

Workings:

Unrealized gain or loss income = 36,000 × ($3 - $2.7)

                                                    = 36,000 × $0.3

                                                     = $10,800

(ii) On January 1, 2018

Raw material A/c (36,000 × $2.7)                     Dr. $97,200

Estimated purchase commitment liability A/c  Dr. $10,800

To accounts payable                                                                $108,000

(To record the materials received in January 2018)