Question

Marvin Gaye Company has been having difficulty obtaining key raw materials for its manufacturing process. The company therefore signed a long-term noncancelable purchase commitment with its largest supplier of this raw material on November 30, 2017, at an agreed price of \(400,000. At December 31, 2017, the raw material had declined in price to \)365,000. Instructions What entry would you make on December 31, 2017, to recognize these facts?

Short answer

In order to recognize this fact, Unrealized Holding Gain or Loss – Income will be debited, and Estimated Liability on Purchase Commitments will be credited by $35,000, respectively.

Step-by-step solution

Calculation of unrealized holding income

The unrealized holding income is calculated as follows:

$\begin{array}{rcl}\mathrm{Unrealized}\mathrm{holding}\mathrm{income}& =& \mathrm{Contract}\mathrm{price}-\mathrm{Market}\mathrm{value}\\ & =& \$400,000-\$365,000\\ & =& \$35,000\end{array}$

Journal entry for unrealized holding gain

The following journal entry will be recorded:

Date	Accounts	Debit	Credit
December 31,2017	Unrealized Holding Gain or Loss - Income	$35,000
	Estimated Liability on Purchase Commitments		$35,000