Question

On October 6, 2018, the Elgin Corporation signed a purchase commitment to purchase inventory for $81,000 on or before March 31, 2019. The company's fiscal year-end is December 31. The contract was exercised on March 21, 2019, 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 $61,000. The market price of the inventory on December 31, 2018, was $70,000. The company uses a perpetual inventory system.

1. Prepare the necessary adjusting journal entry (if any is required) on December 31, 2018

2. Prepare the journal entry to record the purchase on March 21, 2019

Answer 1

Answer:

The Journal entry are as follows:

(i) On December 31, 2018

Estimated loss on purchase commitment A/c   Dr. $11,000

To Estimated liability on purchase commitment                   $11,000

(Being record the loss on purchase commitment )

Loss on purchase commitment:

= Signed value of inventory - market price of the inventory

= $81,000 - $70,000

= $11,000

(ii) On March 21, 2019

Inventory A/c                                                           Dr. $61,000

Loss on purchase commitment A/c                       Dr. $9,000

Estimated liability on purchase commitment A/c  Dr. $11,000

To cash                                                                                             $81,000

(Being record the purchase)

Loss on purchase commitment:

= Market price of inventory Dec. 31,2018 - Market price of inventory on march 21,2019

= $70,000 - $61,000

= $9,000