smith corp. entered into a purchase commitment to buy 1,000 units of raw materials for $30 per unit. as of december 31, the purchase commitment is outstanding and the year-end market price is $28 per unit. smith should recognize

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31-10-2022
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smith corp. entered into a purchase commitment to buy 1,000 units of raw materials for $30 per unit. as of december 31, the purchase commitment is outstanding and the year-end market price is $28 per unit. smith should recognize

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varshamittal029 varshamittal029 · Answer 1 · 2022-11-12T10:59:24+01:00

Smith should recognize a loss of $2000.

An unwavering promise to buy products or services from a provider is known as a purchasing commitment. Companies enter into purchase commitments to lock in a specific pricing and occasionally to lock in a supplier's production capacity as a defensive measure to prevent rivals from exploiting the production capacity.

In the given question,

Units of Raw material = 1000

Unit Price = $30

Units of Raw material outstanding = 1000

Market Price = $28

Now,

Total Raw Material = $30,000

Total Raw Material Outstanding = $28,000

Loss/Profit Incurred = $28,000 - $30,000

Loss Incurred= ($2000)

Therefore, Smith Corp. should recognize a loss of $2000.

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