Question

On July 10, 2018, Johnson Corporation signed a purchase commitment to purchase inventory for $232,000 on or before February 15, 2019. The company's fiscal year-end is December 31. The contract was exercised on February 1, 2019, and the inventory was purchased for cash at the contract price. On the purchase date of February 1, the market price of the inventory was $242,000. The market price of the inventory on December 31, 2018, was $196,000. The company uses a perpetual inventory system.
   
At what amount will Johnson record the inventory purchased on February 1, 2019?

Answer 1

Answer : The amount that Johnson will record the inventory purchased on February 1, 2019 = $196,000.

Explanation : On December 31, 2018, the market price of the inventory is less than the contract price by $36,000 (ie  $232,000 - $196,000).Thus an 'Provisional (Estimated) liability on purchase commitment ' for $36,000 is created.  

On the purchase date of February 1, the market price of the inventory was more than the contract price which creates a gain contingency & gain contingency are not to be recorded in financial statements. Thus for recording purpose we will consider the value of inventory on February 1 as $196,000 only. Cash paid = Contract price of $232,000. And Provisional (Estimated) liability on purchase commitment' created on December 31, 2018 will for $36,000 be debited.

Journal Entry :

Date	General Journals	Debit	Credit
February 1, 2019	Inventory	196,000
	Estimated liability on purchase commitment	36,000
	Cash		232,000