Question

Accounting for Inventory Transactions with Purchase Commitments The following data is from Sonic Inc. Nov. 1,...

Accounting for Inventory Transactions with Purchase Commitments

The following data is from Sonic Inc.

Nov. 1, 2020

Sonic Inc. entered into a purchase contract (not subject to revision or cancellation) to purchase 20,000 units of inventory at $7 per unit (to be used in manufacturing). The contract period extends through February 2021, and Sonic applies a perpetual inventory system and the FIFO inventory method.

Dec. 31, 2020

At Sonic’s December 31 year-end, inventory was being sold at a price of $5 per unit.


Jan. 25, 2021

Sonic purchased the 20,000 units contracted; however, the selling price per unit of inventory on this date was $4.75.


Prepare any necessary journal entries or disclosures on the following dates.

a. November 1, 2020 (initiation of contract).
b. December 31, 2020 (reporting period).
c. January 25, 2021 (purchase date).

  • Note: The selling prices above are net of selling costs.
  • Note: If a line in a journal entry isn't required for the transaction, select "N/A" as the account name and leaver the Dr. and Cr. answers blank (zero)
Ref. Date Account Name Dr. Cr.
a. Nov. 1, 2020 CashAccounts ReceivableInventoryAllowance to Reduce Inventory to Net Realizable ValueAllowance to Reduce Inventory to Market ValueAccounts PayableBonus PayableEstimated Liability on Purchase CommitmentRetained EarningsRetained Earnings—Prior Period AdjustmentSalesCost of Goods SoldCompensation ExpenseHolding Loss on InventoryEstimated Loss on Purchase CommitmentN/A
CashAccounts ReceivableInventoryAllowance to Reduce Inventory to Net Realizable ValueAllowance to Reduce Inventory to Market ValueAccounts PayableBonus PayableEstimated Liability on Purchase CommitmentRetained EarningsRetained Earnings—Prior Period AdjustmentSalesCost of Goods SoldCompensation ExpenseHolding Loss on InventoryEstimated Loss on Purchase CommitmentN/A
b. Dec. 31, 2020 CashAccounts ReceivableInventoryAllowance to Reduce Inventory to Net Realizable ValueAllowance to Reduce Inventory to Market ValueAccounts PayableBonus PayableEstimated Liability on Purchase CommitmentRetained EarningsRetained Earnings—Prior Period AdjustmentSalesCost of Goods SoldCompensation ExpenseHolding Loss on InventoryEstimated Loss on Purchase CommitmentN/A
CashAccounts ReceivableInventoryAllowance to Reduce Inventory to Net Realizable ValueAllowance to Reduce Inventory to Market ValueAccounts PayableBonus PayableEstimated Liability on Purchase CommitmentRetained EarningsRetained Earnings—Prior Period AdjustmentSalesCost of Goods SoldCompensation ExpenseHolding Loss on InventoryEstimated Loss on Purchase CommitmentN/A
c. Jan. 25, 2021 Materials Inventory
CashAccounts ReceivableInventoryAllowance to Reduce Inventory to Net Realizable ValueAllowance to Reduce Inventory to Market ValueAccounts PayableBonus PayableEstimated Liability on Purchase CommitmentRetained EarningsRetained Earnings—Prior Period AdjustmentSalesCost of Goods SoldCompensation ExpenseHolding Loss on InventoryEstimated Loss on Purchase CommitmentN/A
Loss on Purchase Contract
CashAccounts ReceivableInventoryAllowance to Reduce Inventory to Net Realizable ValueAllowance to Reduce Inventory to Market ValueAccounts PayableBonus PayableEstimated Liability on Purchase CommitmentRetained EarningsRetained Earnings—Prior Period AdjustmentSalesCost of Goods SoldCompensation ExpenseHolding Loss on InventoryEstimated Loss on Purchase CommitmentN/A

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