Answer :
To address this question, we need to account for the changes in prices and how they affect the financial entries of Princess Company. This scenario involves purchase commitments and changes in market prices as of specific dates, impacting the financial statements. Let's address each case separately.
Case No. 1:
At the end of 2024: The price per kilogram has dropped to P20, while Princess Company committed to purchasing at P25. This causes a loss of P5 per kilogram.
Journal Entry at the end of 2024:
Loss on Purchase Commitment 100,000
Liability on Purchase Commitment 100,000Calculation:
( \text{Loss per kilo} = 25 - 20 = 5
\text{Total Loss} = 5 \times 20,000 = 100,000 )
On March 15, 2025, when the raw materials are delivered, the price increases to P36; however, the commitment was already locked at P25 per kilo, and there is no impact due to the price change. The liability needs to be settled:
Journal Entry on March 15, 2025:
Inventory 500,000
Liability on Purchase Commitment 100,000
Cash 500,000
Loss on Purchase Commitment 100,000Calculation:
[tex]\text{Inventory (at commitment price)} = 25 \times 20,000 = 500,000[/tex]
Case No. 2:
At the end of 2024: No loss is recorded since the market price of P35 is above the committed price of P25.
On March 15, 2025, the price increases further to P36. Again, no impact on the committed purchase as we recognize the inventory at the committed price when the materials are received:
Journal Entry on March 15, 2025:
Inventory 500,000
Cash 500,000Calculation:
[tex]\text{Inventory} = 25 \times 20,000 = 500,000[/tex]
In summary, the key difference between both cases lies in whether a loss was recognized at the end of 2024 due to a drop in market price below the committed price. In the first case, a loss was recognized, whereas, in the second case, no loss was identified because the market price was above the commitment price at year-end.
