Answer
The drop in the market price of the commitment should be charged to operations in the current year if it is material in amount.
The following entry would be made [(6.20 – 5.90) X 150,000] = 45,000:
Unrealized Holding Gain or Loss—Income (Purchase Commitments)........... 45,000
………………..Estimated Liability on Purchase Commitments.............................................. 45,000
Work Step by Step
The entry is made because a loss in utility has occurred during the period in which the market decline took place. The account credited in the above entry should be included among the current liabilities on the balance sheet with an appropriate note indicating the nature and extent of the commitment. This liability indicates the minimum obligation on the commitment contract at the present time—the amount that would have to be forfeited in case of breach of contract.
