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shilpjain
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| Posted: 30 Jun 2009 at 16:39 | IP Logged
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On Jan 1 1992,Card Corp signed a 3 year non cancelable purchase contract which allows Card to purchase upto 500,000 units of a computer part annually from Hart Supply Co at $.10 per unit and guarantees a minimum annual purchase of 100,000 units . During 1992 , the part unexpectedly became obsolete . Card had 250,000 units in inventory at Dec 31 ,1992 and believes these parts can be sold as scrap for .02 per unit . What amount of probable loss from the purchase commitment should Card report in its 1992 income statement ?
The answer is $16000.
The probable loss from the purchase commitment is the minimum annual purchase of 100,000 units times the 2 years left (1993 and 1994) on the noncancelable purchase contract at $0.08 per unit ($0.10 purchase price - $0.02 scrap value), or $16,000.
My question , why did they not consider the loss on 250,000 units of inventory which is in stock as at dec 31 1992?
Thanks
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rumboj
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| Posted: 30 Jun 2009 at 17:30 | IP Logged
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The question specifically asked for PROBABLE loss which refers to the future. The number of units to be purchased in the future is 200,000 and the loss to be recorded is 0.08 cents per unit so the probable loss is 16,000. The loss relating to the 250,000 units currently in inventory is not probable or even possible, it is a realized loss. So, yes, the total loss would be (250,000*0.08)+(200,000*0.08) but the probable loss is just 16,000.
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asp87
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| Posted: 30 Jun 2009 at 17:40 | IP Logged
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Wow I just made the same mistake on the same problem earlier today. The explanation above makes sense. The 250,000 units has already resulted in a realized loss.
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rumboj
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| Posted: 30 Jun 2009 at 17:47 | IP Logged
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Oh I battled with this question forever before I realized it said PROBABLE loss and not just loss. I have a terrible habit of rushing through reading questions and then missing out on something as simple as one word that changes everything that the question is asking for.
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shilpjain
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| Posted: 30 Jun 2009 at 21:35 | IP Logged
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thanks guys , i just figured that out as soon as i posted the doubt . We have to be very careful about what they ask , it was so easy to make a mistake on this one
Thanks for the help
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