Dealing with purchase contracts

Purchase contracts are often used between grain farmers and grain buyers to lock in a specific tonnage to be sold or purchase price. You’ll have to decide whether or not to record these contracts once they’ve been drawn up.

Ask your accountant if he or she wants these contracts on your books. Nine times out of ten, the answer is no.

However, if you decide it’s to your advantage to record these contracts, you need to look at each contract carefully to determine if you can record the item or not.

Does your contract list a specific purchase price for your inventory?

If the answer is no, then you can’t record the contract. Instead, you’ll record any disclosure in the notes to your financial statements.

If the answer is yes, then you can record the contract.

To record, sell and recognize any gains or losses on your contract:

1. Determine the spot rate (current market value × quantity) and the forward rate (selling price specified in the contract × quantity).
   For example, if you have a contract to sell 100 tonnes of durum at $200 per tonne and durum is currently selling for $185 per tonne, then your spot rate is $18,500 and your forward rate is $20,000.
2. Record the entry for the establishment of the contract.
   • You’ll need to create three new accounts: Contract Receivable (Asset), Premium on Contract (Asset), and Grain Obligations (Liability).
   • Track the Quantities on the Contract Receivable Asset account
3. Determine the market value of the grain as at the contract’s maturation date.
   For example, if, at the date of sale, durum is selling for $195 per tonne, the current market price would be $19,500.
4. Record the entry for the sale, and recognize any gains or losses on the contract.

Last updated on April 9, 2014 by FCC AgExpert