At the End of the Fiscal Year, Apha Airlines Has

question 47

Multiple Choice

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 LCNRV.
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.

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Definitions:

Cost-plus Pricing

A pricing strategy where the selling price is determined by adding a specific markup to the cost of producing or purchasing the product.

Return on Investment

Return on investment is a measure used to evaluate the efficiency or profitability of an investment, calculated as net income divided by the initial cost of the investment.

Selling Price

The amount at which a product or service is offered to customers, factoring in costs, desired profit margins, and market conditions.

Absorption Costing

An accounting system that factors in all production costs—direct labor, direct materials, and both fixed and variable manufacturing overheads—into the pricing of a product.