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.
The solution explains the journal entries for given purchase contracts