In 2006, Lucas Manufacturing signed a contract with a supplier to purchase raw materials in 2007 for $700,000.Before the December 31, 2006 balance sheet date, the market price for these materials dropped to $510,000.The journal entry to record this situation at December 31, 2006 will result in a credit that should be reported
A)as a valuation account to Inventory on the balance sheet.
B)as a current liability.
C)as an appropriation of retained earnings.
D)on the income statement.

Question

Quizplus · Accepted Answer

The credit should be reported as a current liability because the company has a commitment to purchase the materials at a higher price than the current market value, creating a loss contingency.

In 2006, Lucas Manufacturing Signed a Contract with a Supplier