Ask Joey ™ a Question

What is a purchase commitment?

A firm purchase commitment is an agreement that is legally binding that requires a purchaser to purchase a specified amount of goods at a future point in time. If the contract price is in excess of the market price, and if losses are expected when the purchase is actually made, losses should be recognized at the time of the decline in price.

For example, if a company agreed to $5 million and now they believe they will only need to purchase $3 million of materials, then they would need to record a purchase commitment loss of $2 million.

As you can see in the visual below, since the contract resulted in a loss, we would debit estimated loss on purchase commitment for $2,000,000 and the offset is to record a liability for the estimated loss.


You might also be interested in...

  • July 2021 Changes to The CPA Exam: Everything You Need to Know

    Change is right around the corner! The talk of the (CPA) town is that changes are upon us and they are coming quickly. While this is not an overhaul in the way that CPA evolution will be in 2024, there are changes that are being made to all four sections (FAR, REG, AUD, and BEC) […]

  • 2021 AICPA Released Questions

    Buckle up and get ready to crush the CPA exam! The AICPA has released additional multiple choice questions for BEC, AUD, REG, and FAR. We’re beginning to incorporate the questions into the Universal CPA Review platform and we will be uploading videos for certain questions to each of the respective pages below. Creating a high […]

  • AICPA 2021 Released Questions for BEC

    The moment we’ve all been waiting for! Additional question have been released by the AICPA for BEC! The topics are very random, so its a good way to test your understanding if you have been studying. If you haven’t been studying for BEC, it is a great way to see what you will be touching […]