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Question: At December 31, 2017, Indigo Girls Company


At December 31, 2017, 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.

Instructions:
a. Assuming that the market price as of December 31, 2017, 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, 2017, is $2.70, instead of $3.30, how would you treat this situation in the accounts and statements?
c. Give the entry in January 2018, when the 36,000-gallon shipment is received, assuming that the situation given in (b) above existed at December 31, 2017, and that the market price in January 2018 was $2.70 per gallon. Give an explanation of your treatment.

2.99

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