Final answer:
A $2,500 loss on a purchase commitment is recorded by debiting Loss on Purchase Commitment and crediting Estimated Liability under Purchase Commitments to adjust the value to the market price of $7,500 from the original $10,000 commitment at year-end 20X8.
Step-by-step explanation:
On November 1, 20X8, your company signs a $10,000 purchase commitment for goods to be delivered on February 15, 20X9. At year-end 20X8, the estimated value of the goods on order is $7,500. The loss in value needs to be recognized in the financial statements of 20X8 to adhere to the principle of conservatism and represent a fair value of the goods. The journal entry to record the loss in value of the inventory would be a debit to Loss on Purchase Commitment for $2,500 and a credit to Estimated Liability under Purchase Commitments for $2,500. This entry reflects the decline in the market value of the purchase commitment as of the year-end 20X8.
The journal entry would be as follows:
Debit Loss on Purchase Commitment: $2,500
Credit Estimated Liability under Purchase Commitments: $2,500