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On January 2 of the current year, LTTI Co. entered into a three-year, non-cancelable contract to buy up to 1 million units of a product each year at $.10 per unit with a minimum annual guarantee purchase of 200,000 units. At year end, LTTI had only purchased 80,000 units and decided to cancel sales of the product. What amount should LTTI report as a loss related to the purchase commitment as of December 31 of the current year?

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Answer: D. $52,000

Step-by-step explanation:

A commitment to acquire goods in the future is not recorded at the time of the agreement, e.g., by debiting an asset and crediting a liability. But a loss is recognized on a firm, noncancelable, and unhedged purchase commitment if the current market price of the goods is less than the commitment price. The reason for current loss recognition is the same as that for inventory. A decrease (not an increase) in its future benefits should be recognized when it occurs, even if the contract is unperformed on both sides. Material losses expected on purchase commitments are measured in the same way as inventory losses at lower of cost ($.10 per unit) or market (presumably $0), recognized and separately disclosed. The buyer guaranteed the purchase of at least 200,000 units per year for 3 years. It purchased only 80,000 units in the first year before deciding to cancel the purchase commitment. Accordingly, it remains liable for the purchase of 520,000 units [(200,000 units × 3 years) – 80,000 units]. The undiscounted loss is $52,000 (520,000 units × $.10). [However, the guidance for accounting for exit or disposal activities provides for measurement at fair value in this case. Contract termination costs include costs that will continue to be incurred without economic benefit (continuing costs). A liability for continuing costs is recognized and measured at fair value when the right under the contract, e.g., the right to use leased property or to receive future goods, is no longer used. This date is the cease-use date.]

User Lina
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I’m doing this for the points I’m so sorry hopefully you get the answer for this
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