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Answer:
Find below the complete set of question
During 2020, Larue Co., a manufacturer of chocolate candies, contracted to purchase 249000 pounds of cocoa beans at $3.90 per pound, delivery to be made in the spring of 2021. Because a record harvest is predicted for 2021, the price per pound for cocoa beans had fallen to $3.25 by December 31, 2020.
Of the following journal entries, the one which would properly reflect in 2020 the effect of the commitment of Crane Co. to purchase the 249000 pounds of cocoa is
Cocoa Inventory 971100
Accounts Payable 971100
Cocoa Inventory 809250
Loss on Purchase Commitments 161850
Accounts Payable 971100
Unrealized Holding Gain or Loss-Income 161850
Estimated Liability on Purchase Commitments 161850
No entry would be necessary in 2020
The correct option is the given below:
Unrealized Holding Gain or Loss-Income $161,850 Estimated Liability on Purchase Commitments $161,850
Explanation:
Apparently,Larue Co. has committed itself to buying the 249,000 pounds of cocoa in a legal agreement,hence the company is exposed to risk of any moment in the price of cocoa before the delivery date.
As a result,as at 31st December 2020,the company needs to compare the contracted price of $3.90 per pound to the current price reality in the market place.
Information gathered shows that price per would most likely $3.30,this means that the company should recognize the losses in its books.
Unrealized losses=($3.90-$3.25)*249,000=$161,850
This would debited to Unrealized Holding Gain or Loss-Income and credited to Estimated Liability on Purchase Commitments $161,850
