Question

A corporation entered into a purchase commitment to buy inventory. At the end of the accounting period, the current market value of the inventory was less than the fixed purchase price, by a material amount. Which of the following accounting treatments is most appropriate?A. Describe the nature of the contract in a note to the financial statements, recognize a loss in the income statement, and recognize a liability for the accrued lossB. Describe the nature of the contract and the estimated amount of the loss in a note to the financial statements, but do not recognize a loss in the income statementC. Describe the nature of the contract in a note to the financial statements, recognize a loss in the income statement, and recognize a reduction in inventory equal to the amount of the loss by use of a valuation accountD. Neither describe the purchase obligation nor recognize a loss on the income statement or balance sheet

Answer 1

Answer: Option (A) is correct.

From the given options, the following is most appropriate accounting treatment: Identify the state of the agreement in a note to financial statements, identify a loss in income statement, and recognize liability for the accumulated loss.

At stage where  market value of inventory is less than fixed purchase price under purchase engagement, then  loss must be identified at time when there's decline in price,  also a liability must be visualized on  balance sheet and a losses must be characterized in footnotes.