Question

During the prior fiscal year, Cullumber Corp. signed a long-term noncancellable purchase commitment with its primary supplier to purchase $1.78 million of raw materials. Cullumber paid the $1.78 million to acquire the raw materials when the raw materials were only worth $1.49 million. Assume that the purchase commitment was properly recorded. What is the journal entry to record the purchase?

Answer 1

Answer:

Debit Inventory for $1490000, debit Estimated Liability on Purchase Commitments for $290000 and credit Cash for $1780000.

Explanation:

Double entry accounting requires accounting entries to have two legs. The debit where the receiver is debited, and the credit leg where the giver is credited.

In this case Cullumber Corp made a payment of $1.78 million cash, so cash is credited for this amount.

Actual value of raw materials is $1.49 million, so as it is recieved we debit inventory for $1.49 million.

The balance which is a loss is debited from Estimated liability on purchase commitments.

The balance to be debited from this account is 1.78 million - 1.49 million= $290,000