Question 8BE - Intermediate Accounting (Kieso)

Question

Use the information for Kemper Company from BE9-7. In 2018, Kemper paid \(1,000,000 to obtain the raw materials which were worth \)950,000. Prepare the entry to record the purchase

Step-by-Step Solution

Answer

In the entry to record purchase, the purchases account will be debited by $950,000. The estimated liability on the purchase commitments account will be debited by $50,000. The cash account will be credited by $1,000,000.

Estimated Liability on Purchase Commitment is calculated as follows:

$\begin{array}{rcl}\mathrm{Estimated} \mathrm{liability} \mathrm{on} \mathrm{purchase} \mathrm{commitment}& =& \mathrm{Contract} \mathrm{price}-\mathrm{Market} \mathrm{value}\\ & =& \$1,000,000-\$950,000\\ & =& \$50,000\end{array}$

The following entries will be recorded. The purchases are as follows:

Date	Accounts	Debit	Credit
	Purchases (Inventory)	$950,000
	Estimated Liability on Purchase Commitments	$50,000
	Cash		$1,000,000
	Being record the inventory purchased