Exercise 9-12 (Part Level Submission) At December 31, 2017, Swifty Company has o

Question

Exercise 9-12 (Part Level Submission) At December 31, 2017, Swifty Company has outstanding noncancelable purchase commitments for 32,800 gallons, at $4.20 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. (62) Your answer is partially correct. Try again. Assuming that the market price as of December 31, 2017, is $3.78, 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 O for the amounts. Round answers to O decimal places, e.g. 6,225.) Date Account Titles and Explanation Debit Credit Dec. 31 TTAccounts Payable 89,964 Raw Materials 89,964

Explanation / Answer

Note : Under noncancelable purchase commitments , when the  commitment or the contract price is higher than the market price , then the loss on purchase commitments must be recorded in the books.

In the given case purchase commitments is $4.20 per gallon & market price as on Dec.31. is $3.78 per gallon . Thus the loss on  purchase commitments ie 0. 42 per gallon [$4.20 - $3.78] must be recorded in books.

Total loss on  purchase commitments = 32,800 * $0.42 = $13,776

Journal Entry Date Account Titles & Explanation Debit ($) Credit ($) Dec.31 Unrealized loss on purchase commitment 13,776 Estimated liability on purchase commitment 13,776

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