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Chapter 9: Question 7BE (page 475)

Kemper Company signed a long-term noncancelable purchase commitment with a major supplier to purchase raw materials in 2018 at a cost of \(1,000,000. At December 31, 2017, the raw materials to be purchased have a market value of \)950,000. Prepare any necessary December 31, 2017, entry.

Short Answer

Expert verified

As of December 31, 2017, Unrealized Holding Gain or Loss – Income will be debited, and Estimated Liability on Purchase Commitments will be credited by $50,000, respectively.

Step by step solution

01

Calculation of unrealized holding income

The unrealized holding income is calculated as follows:

UnrealizedHoldingincome=Contractprice-MarketValue=$1,000,000-$950,000=$50,000

02

Journal entry for unrealized holding gain

The following journal entry will be recorded:

Date

Accounts

Debit

Credit

Unrealized Holding Gain or Loss - Income

$50,000

Estimated Liability on Purchase Commitments

$50,000

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