Question

Novak company signed a long-term noncancelable purchase commitment with a major supplier to purchase raw materials in 2026 at a cost of 911,500. At December 31, 2025, the raw materials to be purchased have a market value of 863,400. In 2026, Novak paid 911,500 to obtain the raw materials which were worth 863,400. What is the gain or loss on the purchase commitment?

1) Gain of 48,100
2) Loss of 48,100
3) Gain of 48,500
4) Loss of 48,500

Answer 1

The Novak company experienced a loss of 48,100 due to a decrease in market value of the raw materials they were committed to purchasing, as the materials were worth less at the time of delivery than the agreed purchase price. 2) Loss of 48,100

Step-by-step explanation:

The Novak company entered into a purchase commitment to buy raw materials at a certain price, but the market value of these materials decreased by the time they completed the purchase. The company made a commitment to buy the materials for 911,500, but their market value was 863,400 upon delivery. Therefore, the company realized a loss, which is calculated by subtracting the market value of the raw materials on the delivery date from the contract purchase price.

Loss on purchase commitment = Contract price - Market value at delivery
Loss on purchase commitment = 911,500 - 863,400
Loss on purchase commitment = 48,100

This loss represents the economic penalty for entering into a contract where the market price has fallen below the contract price. It would be recorded as a loss of 48,100, which is option 2, 'Loss of 48,100' from the question that was proposed.