Final answer:
In a formal, noncancelable purchase contract, an asset and a liability are recorded at the inception of the contract to represent the buyer's acquisition of value and financial obligation. For example, when a company buys machinery, the machinery is recorded as an asset and a liability is recorded to represent the payment obligation.
Step-by-step explanation:
When a buyer enters into a formal, noncancelable purchase contract, an asset and a liability are recorded at the inception of the contract. This is because the buyer is acquiring an item of value (the asset) and also assuming a financial obligation (the liability) as a result of the contract.
For example, let's say a company enters into a purchase contract to buy a piece of machinery. The machinery would be recorded as an asset on the buyer's balance sheet because it represents a valuable resource that the company owns. At the same time, a liability is recorded to represent the obligation to pay for the machinery.