Hey guys – I have a silly inventory question pertaining to purchase commitments:
On January 1, Year 4, Card Corp. signed a 3-year, noncancelable purchase contract that allows Card to purchase up to 500,000 units of a computer part annually from Hart Supply Co. The price is $.10 per unit, and the contract guarantees a minimum annual purchase of 100,000 units. During Year 4, the part unexpectedly became obsolete. Card had 250,000 units of this inventory at December 31, Year 4, and believes these parts can be sold as scrap for $.02 per unit. What amount of probable loss from the purchase commitment should Card report in its Year 4 income statement?
Answer: The entity must accrue a loss in the current year on goods subject to a firm purchase commitment if their market price declines below the commitment price. This loss should be measured in the same manner as inventory losses. Disclosure of the loss is also required. Consequently, given that 200,000 units must be purchased over the next 2 years for $20,000 (200,000 × $.10), and the parts can be sold as scrap for $4,000 (200,000 × $.02), the amount of probable loss for Year 4 is $16,000 ($20,000 – $4,000).
The part I'm confused with is why it is assumed that he had purchased 200,000 over 2 years. If the commitment was signed on 1/1/YR4 and his ending inventory was 12/31/YR4 then how did he purchase 200,000? I would assume since a year went passed it would be 100,000? I feel like they are assuming he purchased the other batch already although it's 12/31, instead of keeping the purchase at an annual date of 1/1.
Any thoughts?
AUD: DONE
FAR: DONE
BEC: DONE
REG: DONE
IM GOING TO BE A CPA!!!!!
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