Losses on Purchase Committments

Question 1

A contract for a purchase commitment specifies a price of $10 per unit for a commodity. The price is fixed by contract. As of the balance sheet date, the contract had not been executed, and the market price of the commodity had decreased to $7. The firm should report a loss of $3 per unit in the income statement.
True
False

Answer 1

True

Question 2

At the end of 20x4, a firm recognized a loss on a contractual commitment to purchase inventory for $60,000. The value of the inventory at the end of 20x4 is $52,000. When the inventory was actually purchased in 20x5, its value had risen to $62,000. Choose the correct statement concerning reporting in 20x5.

1. A $10,000 gain is recognized.
2. The inventory is recorded at $60,000.
3. The inventory is recorded at $52,000.
4. There is no additional loss or gain recognized.

Answer 2

2. The inventory is recorded at $60,000

The maximum recorded value of the inventory is $60,000, which is the contractual amount and, also, the cost. If the firm can sell the inventory for more than $60,000, then gross margin will be recognized. The value of the inventory more than fully recovered, but gains are limited to the amount of previously recognized losses, which in this case, is $8,000.