At December 31, 2025, Indigo Girls Company has outstanding noncancelable purchase commitments for 36,000 gallons, at $3.00 per gallon, of raw material to be used in its manufacturing process. The company prices its raw material inventory at cost or market, whichever is lower, and uses a perpetual inventory system.

Instructions

a. Assuming that the market price as of December 31, 2025, 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, 2025, is $2.70, instead of $3.30, how would you treat this situation in the accounts and statements?

c. Give the entry in January 2026, when the 36,000-gallon shipment is received, assuming that the situation given in (b) above existed at December 31, 2025, and that the market price in January 2026 was $2.70 per gallon. Give an explanation of your treatment.