Question

Skysong Company signed a long-term noncancelable purchase commitment with a major supplier to purchase raw materials in 2021 at a cost of $1,032,100. At December 31, 2020, the raw materials to be purchased have a market value of $984,100. In 2021, Skysong paid $1,032,100 to obtain the raw materials which were worth $984,100. Prepare the entry to record the purchase.

Answer 1

To record the purchase of raw materials by Skysong Company, debit Inventory for $984,100 and Loss on Purchase Commitment for $48,000, then credit Cash for $1,032,100. This reflects the cost of purchase and the loss incurred due to the market value being lower than the purchase price.

Step-by-step explanation:

The Skysong Company entered into a purchase commitment and subsequently purchased raw materials, resulting in a transaction to be recorded in its financial books. Given that the purchase price was higher than the market value at the time of purchase, the accounting entry needed is as follows:

• Debit Inventory for the market value of the raw materials at the time of purchase: $984,100.
• Debit Loss on Purchase Commitment for the difference between the purchase price and the market value: $1,032,100 - $984,100 = $48,000.
• Credit Cash for the total purchase price paid: $1,032,100.

The calculation of the Loss on Purchase Commitment ($48,000) is crucial to reflect the economic reality that the company paid more for the raw materials than their market value at the time of purchase.

Answer 2

Answer:Skysong journal $

Date

December 2020

Raw material Dr 984,100

Loss on raw material 48,000

Supplier Cr 1,032,100

Narration. recognition of raw materials purchased at agreed value.

2021

Supplier Dr. 1,032,100

Bank Cr. 1,032,100

Narration. Payment for raw materials purchased at agreed value.

Step-by-step explanation:

The raw materials needs to be paid for at the agreed value not withstand ing the fall in value. However stock are to be recognized at cost or net realisable value which ever is less and since the market value of the stock has dropped this has to be recognized as a loss in the income statement to avoid the stock been over value.