At December 31, 2019, Volkan AG has outstanding noncancelable purchase commitments for 40,000 gallons, at €3.00 per gallon, of raw material to be used in its manufacturing process. The company prices its raw material inventory at lower-of-cost-or-net realizable value.
Instructions
a. Assuming that the market price as of December 31, 2019, is €3.30, how would this matter be treated in the accounts and statements? Explain.
b. Assuming that the market price as of December 31, 2019, is €2.70 instead of €3.30, how would you treat this situation in the accounts and statements?
c. Give the entry in January 2020, when the 40,000-gallon shipment is received, assuming that the situation given in (b) above existed at December 31, 2019, and that the market price in January 2020 was €2.70 per gallon. Give an explanation of your treatment.