On October 6, 2016, the Elgin Corporation signed a purchase commitment to purcha

Question

On October 6, 2016, the Elgin Corporation signed a purchase commitment to purchase inventory for $72,000 on or before March 31, 2017. The company's fiscal year-end is December 31. The contract was exercised on March 21, 2017, and the inventory was purchased for cash at the contract price. On the purchase date of March 21, the market price of the inventory was $58,000. The market price of the inventory on December 31, 2016, was 564,000. The company uses a perpetual inventory system. Required: 1. Prepare the necessary adjusting journal entry (if any is required) on December 31, 2016.

Explanation / Answer

Dr. Loss on purchase commitment $8,000

Cr. Allowance for Purchase Commitment $8,000

Contract price - Fair value of the inventory

$72,000 - 64,000 = $8,000

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