Can someone please explain why the answer to question below is $16000? Thank you all.
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?
A. $8,000
B. $20,000
C. $24,000
D. $16,000
Explanation is provided below, im confused becuase the ending inventory is 250,000 but Gleim multiplied the disposal cost by 200,000
Answer (D) is correct.
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).
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