On July 10, 2016, Johnson Corporation signed a purchase commitment to purchase i

Question

On July 10, 2016, Johnson Corporation signed a purchase commitment to purchase inventory for $310,000 on or before February 15, 2017. The company's fiscal year-end is December 31. The contract was exercised on February 1, 2017 and the inventory was purchased for cash at the contract price. On the purchase date of February 1, the market price of the inventory was $319,000. The market price of the inventory on December 31, 2016, was $281,000. The company uses a perpetual inventory system. How much loss on purchase commitment will Johnson recognize in 2016?

Explanation / Answer

Johnson should recognize a Loss of $ 29,000 in the income statement for the year ended 2016

Inventory should be valued at lower of Net realizable value or cost of purchases

Since ,market price of the inventory on December 31, 2016, was $281,000 which is lower than the cost of purchases i.e.$310,000

Therefore ,loss = $ 29,000

Note: Johnson Corporation should recognise loss even though purchase of inventory was not made during the year 2016 as risks and rewards associated with the inventory has been transferred to Johnson Corporation due to signed a purchase commitment during the year 2016.(on july 10,2016)  

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