Final answer:
The drop in market price for raw materials contracted by Orear Manufacturing before the purchase does not directly result in a journal entry for the year 2012. Accounting standards require recognition of a loss only when the purchase occurs or if the loss is probable and estimable, neither of which is specified in the question information.
Step-by-step explanation:
Based on the given scenario, Orear Manufacturing signed a contract to purchase raw materials in 2013 for a set price, but the market value subsequently dropped before the year ended. The question pertains to how this situation should be accounted for in the company's financial records. For accounting purposes, the decline in market value before the purchase has occurred does not result in an immediate financial transaction that would be recorded in the 2012 accounts. Instead, this is a contingent event where a potential loss is recognized only when the purchase actually occurs in 2013 or if it is probable and the amount can be reasonably estimated. If the latter were true, it could result in a credit reported as a loss on the income statement or disclosed in the footnotes depending on the circumstances, but there is not enough information provided here to determine that. Moreover, without additional pertinent information regarding the company's method of inventory valuation or other relevant accounting policies, no entry is recorded. It is also important to remember that accounting standards and principles like the conservatism principle and relevant GAAP or IFRS standards will guide how such situations are recorded.