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Purchase contracts

A company entered into the following material contracts at the beginning of the year:

Contract 1: The Company agreed to purchase 200,000 sprockets during the next 4 years at a price of $20 per sprocket. The contract is not cancellable. As of the end of the year, the market price for a sprocket was $22.

Contract 2: The Company entered into a contract that allows it to purchase up to 1,000,000 barrels of oil at $55/barrel. The spot price oil at the end of the year was $48/barrel. The contract specifies that to receive the price of $55/barrel the company must purchase at least 100,000 barrels in a single transaction. Should the company not purchase a lot of at least 100,000 barrels, the company will have to pay the current spot price.

Contract 3: A company has entered into a contract to purchase widgets. The contract provides that the company will purchase 50,000 widgets at a price of $45 each during the next 5 years. The contract is not cancellable. As of the end of the year, the market price for a widget was $43.

Instructions:

For each of the above contracts, prepare any necessary journal entries and notes to be included in the financial statements.

Solution Summary

The solution explains the journal entries for given purchase contracts

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