In 2014, Orear Manufacturing signed a contract with a supplier to purchase raw materials in 2015 for $700,000. Before the December 31, 2014 balance sheet date, the market price for these materials dropped to $510,000. The journal entry to record this situation at December 31, 2014 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 correct treatment for the decline in market price of the raw materials Orear Manufacturing is committed to purchase is to recognize a loss and a liability for the difference between the contracted price and the market price at the balance sheet date. This is recorded as a current liability because it represents an obligation that the company will need to settle in the near future, reflecting the loss in value of the future purchase due to market price changes.

In 2014, Orear Manufacturing Signed a Contract with a Supplier