Question 7BE - Intermediate Accounting (Kieso)

Question

Kemper Company signed a long-term noncancelable purchase commitment with a major supplier to purchase raw materials in 2018 at a cost of \(1,000,000. At December 31, 2017, the raw materials to be purchased have a market value of \)950,000. Prepare any necessary December 31, 2017, entry.

Step-by-Step Solution

Answer

As of December 31, 2017, Unrealized Holding Gain or Loss – Income will be debited, and Estimated Liability on Purchase Commitments will be credited by $50,000, respectively.

Calculation of unrealized holding income

The unrealized holding income is calculated as follows: 

$\begin{array}{rcl}\mathrm{Unrealized} \mathrm{Holding} \mathrm{income} & =& \mathrm{Contract} \mathrm{price}-\mathrm{Market} \mathrm{Value}\\ & =& \$1,000,000-\$950,000\\ & =& \$50,000\end{array}$

Journal entry for unrealized holding gain

The following journal entry will be recorded: 

Date	Accounts	Debit	Credit
	Unrealized Holding Gain or Loss - Income	$50,000
	Estimated Liability on Purchase Commitments		$50,000