Question

During the prior fiscal year, Cullumber Corp. signed a long-term noncancellable purchase commitment with its primary supplier to purchase $2.02 million of raw materials. Cullumber paid the $2.02 million to acquire the raw materials when the raw materials were only worth $1.61 million. Assume that the purchase commitment was properly recorded. What is the journal entry to record the purchase?

Debit Inventory for $1610000, debit Estimated Liability on Purchase Commitments for $410000 and credit Cash for $2020000.

Debit Inventory for $1610000, and credit Cash for $1610000.

Debit Inventory for $1610000, debit Unrealized Holding Gain or Loss for $410000, and credit Cash for $2020000.

Debit Inventory for $2020000, and credit Cash for $2020000.

Answer 1

Option (c)

Since, the worth of raw material is $1.61 million,cost of inventory has to be debited with $1610000.

There is a loss of $410000 when cullumber corp. purchased inventory for $2020000. So loss on purchase of inventory has to be debited.

Since there is outflow of cash of $2020000 when inventory was purchased,cash has to be credited.

Therefore journal entry is

Debit inventory for $1610000, debit unrealized loss of $410000 and credit cash for $2020000.