The Wendy Company Entered into a Non-Cancellable Fixed Price Purchase

The Wendy Company entered into a non-cancellable fixed price purchase obligation on July 20, 2010, to purchase 3, 000 assemblies at $6.50 per assembly to be delivered on March 2, 2012.On December 31, 2011, the replacement cost of the assembly was determined to be $5.90 per assembly.Which of the following adjusting journal entries would be correct as of December 31, 2011, to account for the price change?

A)
$\begin{array}{cr}\text { Inventory (or Purchases) } & 17,700 \\\text { Loss on Purchase Commitments } & 1,800 \\\text { Accounts Payable } & 19,500\end{array}$
B)
$\begin{array}{cc}\text { Loss on Purchase Commitments } & 1,800 \\\text { Inventory (or Purchases) } & 1,800\end{array}$
C)
Loss on Purchase Commitments $\quad 1,800$
Accrued Loss on Purchase Commitments $\quad 1,800$
D)
$\begin{array}{lrl}\text { Accounts Payable } & 1,800 & \\\text { Inventory (or Purchases) } & & 1,800\end{array}$

Correct Answer:

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