CMA Study Group

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  • 1.  Purchase Commitment - Question

    Posted 11-23-2021 08:32 PM
    We usually record unrealized loss if noncancelable purchase commitment price is higher than current market price, what if the purchase commitment price is lower that market? is it allowed to record unrealized revenue?

    Thank you!

    Noor Jarrar

  • 2.  RE: Purchase Commitment - Question

    Posted 11-24-2021 03:44 AM
    Hello Miss Noor Jarrar

    The gain is not accounted for. When accounting for purchases the goal is account for the economic resources reasonably expended. Say Timber is priced at $100 today and a non cancellable purchase order is made for it for puchase after 6 months. Immediately after the order is made the price of timber goes to $1000. This notional gain of $900 is not accounted for by the purchaser. The entry passed will be Timber or Inventory Dr 100 Accounts payable Cr 100. Hope this answers your query

    However it should be noted that purchase committments are not likely to be tested in the CMA examination

    Shravan Ravi
    Chennai TN