Question

Kemper Company signed a long-term, non-cancelable purchase commitment with a major supplier to purchase raw materials in 2023 at a cost of $1,000,000. At December 31, 2022, the raw materials to be purchased have a fair value of $950,000. In 2023, Kemper paid $1,000,000 to obtain the raw materials which were worth $950,000. Prepare the entry to record the purchase

Answer 1

The journal entry for Kemper Company's purchase of raw materials worth $950,000 for $1,000,000 includes a debit to Raw Materials Inventory for $950,000, a debit to Loss on Purchase Commitment for $50,000, and a credit to Cash for $1,000,000.

Step-by-step explanation:

The Kemper Company must record the purchase of the raw materials and the associated loss due to the fair value being lower than the purchase price. The journal entry to record this transaction in 2023 when Kemper pays and receives the materials would be as follows:

1. Debit Raw Materials Inventory $950,000
2. Debit Loss on Purchase Commitment $50,000
3. Credit Cash $1,000,000

This entry assumes that the purchase agreement is accounted for under the lower of cost or market rule where the commitment must be recorded at fair value if it is below cost. Raw materials are booked at their fair value on the date of purchase while the remaining $50,000 is recognized as a loss to reflect the decline in value of the materials from the contracted price to the fair value.