Question

In February 20X3, La Fondue Ltd. signed a two-year contract with a Quebec cheese supplier to provide a minimum of 1,000 kilograms of fine cheese for fondue at a fixed price of $20 per kilogram. By the end of September, La Fondue had purchased 650 kg at the agreed-upon price. By the end of October, the end of the fiscal year, the open market price of the cheese dropped to $17 per kg due to excess capacity in the dairy industry. On 27 November, La Fondue purchased 350 kg at the contract price of $20. The open market price was $18 at that time.

 

Required:

Prepare any journal entries that are necessary on La Fondue’s books to record the events in October and November.

Answer 1

31 October:

 

Loss on onerous purchase commitment (350 kg × $3 loss)..............   1,050

       Provision for onerous purchase contract ....................................                        1,050

       

 

27 November:

 

Inventory (350 kg × $18)...................................................................          6,300

Provision for onerous purchase commitment.....................................   1,050

       Accounts payable (or cash) (350 kg × $20)................................                            7,000

       Recovery of holding loss (350 kg × $1).....................................                                 350

       

Any inventory remaining in storage at year-end should be written down to market price if fair value is lower than cost.

Any inventory remaining in storage at year-end should be written down to market price if fair value is lower than cost.