Final answer:
Kemper Company must recognize a $50,000 loss on its long-term noncancelable purchase commitment because the market value of the raw materials decreased from the contract price. The loss is recorded with a debit to Loss on Purchase Commitment and a credit to Estimated Liability on Purchase Commitment.
Step-by-step explanation:
When Kemper Company signed a long-term noncancelable purchase commitment to buy raw materials at a cost of $1,000,000, and the market value of these materials decreased to $950,000 by December 31, 2020, the company must recognize a loss due to a decrease in the market value of the materials that it has committed to purchase. This loss reflects a 'mark-to-market' accounting principle, where the value of the assets is adjusted to reflect their current market value, even though the transaction has not yet occurred.
To record this transaction, Kemper Company would make the following journal entry on December 31, 2020:
- Debit Loss on Purchase Commitment: $50,000
- Credit Estimated Liability on Purchase Commitment: $50,000
This entry recognizes a loss of $50,000, which is the difference between the contracted purchase price and the market value of the materials on the balance sheet date.