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What is the journal entry to record a loss on a purchase commitment?

A loss on a purchase commitment occurs when the contract price is in excess of the market 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.

The loss of $2,000,000 would be recognized in the financial statements when the market value of the contract fell below the contract value. The company would debit the income statement for the estimated loss on purchase commitment with the offsetting credit to record a liability on the balance sheet.

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