Just before the end of the year, Matawan Inc., entered into a contract with a supplier to purchase $100,000 of product per year over the next 5 years.The amount is a significant amount of their annual purchases.How should the contract be reflected in the current financial statements?
A)Accrued as a contingent liability.
B)Accrued as an accrued liability.
C)Disclosed as a contingent liability in the notes to the financial statements.
D)Disclosed as a commitment in the notes to the financial statements.

Question

Quizplus · Accepted Answer

The contract should be disclosed as a commitment in the notes to the financial statements as it is not yet a definite liability, but rather a potential obligation that the company has committed to. This will provide transparency to stakeholders about the company's future commitments and potential cash outflows. Accruing the liability would not be appropriate as it is not yet a definite obligation. Disclosing it as a contingent liability may not accurately reflect the nature of the commitment.

Just Before the End of the Year, Matawan Inc