During the current fiscal year, Jeremiah Corp. signed a long-term noncancellable purchase commitment with its primary supplier. Jeremiah agreed to purchase $1.5 million of raw materials during the next fiscal year under this contract. At the end of the current fiscal year, the raw material to be purchased under this contract had a market value of $1.2 million. What is the journal entry at the end of the current fiscal year?
A) Debit Unrealized Holding Gain or Loss for $300,000 and credit Estimated Liability on Purchase Commitment for $300,000.
B) Debit Estimated liability on Purchase Commitments for $300,000 and credit Unrealized Holding Gain or Loss for $300,000.
C) Debit Unrealized Holding Gain or Loss for $1,200,000 and credit Estimated Liability on Purchase Commitments for $1,200,000.
D) No journal entry is required.

Question

Quizplus · Accepted Answer

The correct answer is to recognize a loss due to the market value of the raw materials being lower than the contract price. This is done by debiting Unrealized Holding Gain or Loss and crediting Estimated Liability on Purchase Commitment for the difference of $300,000.

During the Current Fiscal Year, Jeremiah Corp