15-37 (Accounting Estimates) An Alfalfa co-op has an agreement with its farmers to purchase alfalfa at a price that is currently 5% above the existing market price. In addition, the co-op has agreed to pay the farmers interest at 2% for each month delivery is delayed beyond December 31, 2009. Management expects that at least 14,500 tons will be delivered sometime after the balance sheet date.
Required
A. What factors should be considered in making an estimate of the loss accrual?
B. Assuming the amount of the purchase commitment is material, what information should management disclose in the footnotes to the financial statements concerning this purchase commitment?
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