[Anonymous]

On January 2 of the current year, LTTI Co. entered into a three-year, noncancelable contract to buy up to 1,000,000 units of a product each year at $.10 per unit with a minimum annual guarantee purchase of 200,000 units. At year-end, LTTI had only purchased 80,000 units and decided to cancel sales of the product. What amount should LTTI report as a loss related to the purchase commitment as of December 31 of the current year?

A. $0

B. $8,000

C. $12,000

D. $52,000

LTTI had a purchase commitment for 600,000 units (200,000 × 3) and purchased 80,000 units. By canceling sales of the product, LTTI has a loss of $52,000 (520,000 units × .10).

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Why is LTTI recognizing a loss? It doesn’t say anything about any costs of breaking a contract. LTTI promises to buy X amount, and did not buy that amount. Shouldn’t it be the seller that recognizes the loss, not the buyer?

[umkcfuturecpa]

The contract is noncancellable, so LTTI must still purchase those additional minimum units and take a loss on them.

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[Author]

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