Question

During 2016, Boge Corporation signed a noncancelable contract to purchase 10,000 bushels of soybeans at $5...

During 2016, Boge Corporation signed a noncancelable contract to purchase 10,000 bushels of soybeans at $5 per bushel with delivery to be made in 2017. On December 31, 2016, the price of soybeans had fallen to $4.50 per bushel. On May 1, 2017, Boge takes delivery of the soybeans when the price is $4.75 per bushel.

Required:

Prepare the journal entries required on December 31, 2016, and May 1, 2017.
Business   Accounting   
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SOLUTION

Date Accounts titles and Explanation Debit ($) Credit ($)
December 31, 2016 Loss on purchase commitment 5,000
Accrued loss on purchase commitment 5,000
(To record the purchase under noncancelable purchase obligation) (10,000*($5-$4.50))
May 1, 2017 Accrued loss on purchase commitment 2,500
Recovery of accrued loss on purchase commitment 2,500
(To record the recovery of loss from the purchase obligation) (10,000*($5-$4.75))
Inventory 47,500
Accrued loss on purchase commitment 2,500
Accounts payable (10,000*$5) 50,000
(To record the purchase of Soybeans under purchase obligation)
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