Exercise 9-12

At December 31, 2017, Stellar Company has outstanding noncancelable purchase commitments for 39,000 gallons, at $3.54 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.

Part 1: Assuming that the market price as of December 31, 2017, is $3.19, record the journal entry.

Part 2: Give the entry in January 2018, when the 39,000-gallon shipment is received, assuming that the situation given in (b2) above existed at December 31, 2017, and that the market price in January 2018 was $3.19 per gallon. Prepare the journal entry for when the materials are received in January 2018.