At the end of the fiscal year, Apha Airlines has an outstanding non-cancellable purchase commitment for the purchase of 1 million gallons of jet fuel at a price of €4.10 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 €4.50, how would this situation be reflected in the annual financial statements?
A) Record unrealized gains of €400,000 and disclose the existence of the purchase commitment.
B) No impact.
C) Record unrealized losses of €400,000 and disclose the existence of the purchase commitment.
D) Disclose the existence of the purchase commitment.

Question

Quizplus · Accepted Answer

Since the market price is higher than the purchase price, there's no need to record a loss under LCNRV (Lower of Cost or Net Realizable Value) accounting. However, the existence of the purchase commitment should be disclosed in the financial statements. Unrealized gains are not recognized for inventory purchase commitments under most accounting standards.

At the End of the Fiscal Year, Apha Airlines Has