Question

Medi Corporation, a manufacturer of ethnic foods, contracted in 2016 to purchase 2,000 pounds of a spice mixture at $5.15 per pound, delivery to be made in May of 2017. By December 31, 2016, the price per pound of the spice mixture had risen to $5.65 per pound. In 2016, Medi should recognize

A) a loss of $1,000.
B) no gain or loss.
C) a gain of $1,000.
D) a loss of $10,300.

Answer 1

Medi Corporation, having not yet received or paid for the spice mixture by the end of 2016, should not recognize any gain or loss despite the market price increase. Therefore, the answer is B) no gain or loss.

Step-by-step explanation:

The student's question relates to the recognition of gains or losses based on future contracts in accounting. In this scenario, Medi Corporation contracted to purchase a spice mixture at a certain price, but the market price of the spice mixture increased before the delivery date.

Under most accounting standards, such as the Generally Accepted Accounting Principles (GAAP), a company does not recognize gains or losses on the contract until the transaction occurs or certain conditions are met for hedge accounting.

Since Medi Corporation has not yet received the goods nor has it paid the increased price, it should not recognize a gain or loss as of December 31, 2016. Therefore, the correct answer in this case is B) no gain or loss.