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Chapter 9: Question 11E (page 478)

Marvin Gaye Company has been having difficulty obtaining key raw materials for its manufacturing process. The company therefore signed a long-term noncancelable purchase commitment with its largest supplier of this raw material on November 30, 2017, at an agreed price of \(400,000. At December 31, 2017, the raw material had declined in price to \)365,000. Instructions What entry would you make on December 31, 2017, to recognize these facts?

Short Answer

Expert verified

In order to recognize this fact, Unrealized Holding Gain or Loss – Income will be debited, and Estimated Liability on Purchase Commitments will be credited by $35,000, respectively.

Step by step solution

01

Calculation of unrealized holding income

The unrealized holding income is calculated as follows:

Unrealizedholdingincome=Contractprice-Marketvalue=$400,000-$365,000=$35,000

02

Journal entry for unrealized holding gain

The following journal entry will be recorded:

Date

Accounts

Debit

Credit

December 31,2017

Unrealized Holding Gain or Loss - Income

$35,000

Estimated Liability on Purchase Commitments

$35,000

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