During 2007 R Corp. , a manufacturer of chocolate candies, contracted to purchase 100,000 pounds of cocoa beans at $1.00 per pound, delivery to be made in the spring of 2008. Because a record harvest is predicted for 2008, the price per pound for cocoa beans had fallen to $.80 by December 31, 2007. Of the following journal entries, the one that would properly reflect in 2007 the effect of the commitment of R Corp. to purchase the 100,000 pounds of cocoa is
|
Debit |
Credit |
|
a. Cocoa Inventory |
100,000 |
|
Accounts Payable |
100,000 |
|
b. Cocoa Inventory |
80,000 |
|
Loss on Purchase Commitments (an expense account) |
20,000 |
|
Accounts Payable |
100,000 |
|
c. Loss on Purchase Commitments (an expense account) |
20,000 |
|
Accrued Loss on Purchase |
|
|
Commitments (a liability account) |
20,000 |
|
d. No entry would be necessary in 2007. |