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brilliants [131]
3 years ago
8

During the current year, the Guileman Manufacturing Company signed a noncancelable contract to purchase 1,000 lbs. of a raw mate

rial at $32 per lb. during the forthcoming year. On December 31, the market price of the raw material is $26 per lb., and the selling price of the finished product is expected to decline accordingly. The financial statements prepared for the year should report...A. An appropriation of retained earnings for $6,000.B. A loss of $6,000 in the income statement.C. Nothing regarding this matter.D. A note describing the expected loss on the purchase commitment.
Business
1 answer:
Dovator [93]3 years ago
5 0

Answer:

B) A loss of $6,000 in the income statement.

Explanation:

The appropriate journal entry should be:

December 31 (recognition of loss on purchase commitments)

  • Dr Loss on Purchase Commitments account 6,000
  • Cr Accrued Loss on Purchase Commitments account 6,000

Since the price of raw materials lowered by $6,000, the company lost money on its purchase commitments:

Purchase commitments loss = contracted price - market value = $32,000 - $26,000 = $6,000

The loss on purchase commitments is an expense, and accrued loss on purchase commitments is a liability.

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