At December 31, 2020, Oriole Company has outstanding noncancelable purchase commitments for 37,600 gallons, at $3.24 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.

A.) Assuming that the market price as of December 31, 2020, is $2.70, record the journal entry.

B.) Give the entry in January 2018, when the 36,000-gallon shipment is received, assuming that the situation given in (b2) above existed at December 31, 2020, and that the market price in January 2021 was $2.70 per gallon. Prepare the journal entry for when the materials are received in January 2021.

Unrealized holding Gain or Loss - Income (Dr.) $20,304

Estimated Liability on purchase commitments (Cr.) $20,304

Explanation:

Oriole Company has agreed to purchase Gallons of raw material for a defined price of $3.24 per gallon. The price is reduced on December 31, 2020. The Difference between the prices of gallons is recorded as unrealized gain on debit and liability is credited.

$3.24 - $2.70 = $0.54 * 37,600 Gallon = $20,304

Unrealized holding Gain or Loss - Income (Dr.) $20,304

Estimated Liability on purchase commitments (Cr.) $20,304

The raw material is purchased at the price of $2.70 per gallon and the 36,000 gallons are purchased. The journal entry to record this transaction is,

Raw material (Dr.) $76,896

Estimated liability on purchase commitments (Dr.) $20,304

Cash (Cr.) $97,200