At the end of the fiscal year, Apha Airlines has an outstanding purchase commitment for the purchase of 1 million gallons of jet fuel at a price of €4.60 per gallon for delivery during the coming summer. The company prices its inventory at the LCNRV. If the market price for jet fuel at the end of the year is €4.25, how would this situation be reflected in the annual financial statements?
A) Record unrealized gains of €350,000 and disclose the existence of the purchase commitment.
B) No impact.
C) Record unrealized losses of €350,000 and disclose the existence of the purchase commitment.
D) Disclose the existence of the purchase commitment.

Question

Quizplus · Accepted Answer

According to the lower-of-cost-or-net-realizable-value (LCNRV) method, the inventory should be valued at the lower of its purchase cost or its net realizable value. In this case, since the market price for jet fuel has decreased to €4.25 per gallon, Apha Airlines would have an unrealized loss of €0.35 per gallon or €350,000 in total for the outstanding purchase commitment. Therefore, Apha Airlines should record an unrealized loss of €350,000 and disclose the existence of the purchase commitment in its annual financial statements.

At the End of the Fiscal Year, Apha Airlines Has