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44. At the end of the fiscal year, Apha Airlines has an outstanding
non-cancellable purchase commitment for the purchase of 1 million
gallons of jet fuel at a price of $4.10 per gallon for delivery during
the coming summer. The company prices its inventory at the lower of
cost or market. If the market price for jet fuel at the end of the year is
$4.50, how would this situation be reflected in the annual financial
statements?
a. Record unrealized gains of $400,000 and disclose the existence of
the purchase commitment.
b. No impact.
c. Record unrealized losses of $400,000 and disclose the existence of
the purchase commitment.
d. Disclose the existence of the purchase commitment.
45. At the end of the fiscal year, Apha Airlines has an outstanding
purchase commitment for the purchase of 1 million gallons of jet fuel
at a price of $4.60 per gallon for delivery during the coming summer.
The company prices its inventory at the lower of cost or market. If the
market price for jet fuel at the end of the year is $4.25, how would this
situation be reflected in the annual financial statements?
a. Record unrealized gains of $350,000 and disclose the existence of
the purchase commitment.
b. No impact.
c. Record unrealized losses of $350,000 and disclose the existence of
the purchase commitment.
d. Disclose the existence of the purchase commitment.
46. How is the gross profit method used as it relates to inventory
valuation?