In March 2016, the Phillips Tool Company signed two purchase commitments. The fi

Question

In March 2016, the Phillips Tool Company signed two purchase commitments. The first commitment requires Phillips to purchase inventory for $120,000 by June 15, 2016. The second commitment requires the company to purchase inventory for $170,000 by August 20, 2016. The company's fiscal year-end is June 30. Phillips uses a periodic inventory system.

The first commitment is exercised on June 15, 2016, when the market price of the inventory purchased was $95,000. The second commitment was exercised on August 20, 2016, when the market price of the inventory purchased was $130,000.

1. Record the purchase of inventory related to the first purchase commitment (June 15).

2. Record any necessary adjusting entry related to the second purchase commitment (June 30).

3. Record the purchase of inventory related to the second purchase commitment (Aug 20).

The first commitment is exercised on June 15, 2016, when the market price of the inventory purchased was $95,000. The second commitment was exercised on August 20, 2016, when the market price of the inventory purchased was $130,000.

1. Record the purchase of inventory related to the first purchase commitment (June 15).

2. Record any necessary adjusting entry related to the second purchase commitment (June 30).

3. Record the purchase of inventory related to the second purchase commitment (Aug 20).

Explanation / Answer

Journal entry to be recorded in Phillips Tool Company books Datte Account Titles and Explanation Debit Credit Jun. 15, 2016 Inventory $                    95,000 loss on purchase commitments $                    25,000 Accounts payable $               1,20,000 Purchase of inventory for first purchase commitments Jun. 30, 2016 Loss on purchase commitments $                    40,000 Liability on Purchase commitments $                  40,000 (adjusting entry related to second purchase commitments on fiscal year end based on market price known) Aug. 20, 2016 Inventory $                 1,30,000 Liability on Purchase commitments $                    40,000 Accounts payable $               1,70,000 Purchase of inventory related to second purchase commitment Note: The potential loss (related to second purchase commitment)when the commitments cannot be modified must be recognised on acrual basis, if the loss is probable and can be estimated. Also the inventory value to be recorded on the basis of market value and the difference between market value and contract value is treated as a loss (if contract value is greater than market value)

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