At the end of the fiscal year, Apha Airlines has an outstanding non-cancellable purchase commitment for the purchase of 1 million gallons of jet fuel at a price of $4.10 per gallon for delivery during the coming summer. The company prices its inventory at the lower of cost or market. If the market price for jet fuel at the end of the year is $4.50, how would this situation be reflected in the annual financial statements?
A) Record unrealized gains of $400,000 and disclose the existence of the purchase commitment.
B) No impact.
C) Record unrealized losses of $400,000 and disclose the existence of the purchase commitment.
D) Only disclose the existence of the purchase commitment.

Question

Quizplus · Accepted Answer

Since the market price is higher than the contract price, there's no loss to record. The company should disclose the commitment in the notes to the financial statements, but there's no need to record unrealized gains or losses because the inventory has not been purchased or recorded on the balance sheet yet.

At the End of the Fiscal Year, Apha Airlines Has