Question

Skysong Company signed a long-term noncancelable purchase commitment with a major supplier to purchase raw materials in 2021 at a cost of $1,032,100. At December 31, 2020, the raw materials to be purchased have a market value of $984,100. In 2021, Skysong paid $1,032,100 to obtain the raw materials which were worth $984,100. Prepare the entry to record the purchase.

Answer 1

Answer:Skysong journal $

Date

December 2020

Raw material Dr 984,100

Loss on raw material 48,000

Supplier Cr 1,032,100

Narration. recognition of raw materials purchased at agreed value.

2021

Supplier Dr. 1,032,100

Bank Cr. 1,032,100

Narration. Payment for raw materials purchased at agreed value.

Explanation:

The raw materials needs to be paid for at the agreed value not withstand ing the fall in value. However stock are to be recognized at cost or net realisable value which ever is less and since the market value of the stock has dropped this has to be recognized as a loss in the income statement to avoid the stock been over value.