Question

E7-1 LO7-1 Analyzing Items to Be Included in Inventory Based on its physical count of inventory in its warehouse at yearend, December 31 of the current year, Plummer Company planned to report inventory of $34,000. During the audit, the independent CPA devel oped the following additional information: a. Goods from a supplier costing $700 are in transit with UPS on December 31 of the current year. The terms are FOB shipping point (explained in the Required" section). Because these goods had not yet arrived, they were excluded from the physical inventory count. b. Plummer delivered samples costing $ 1.800 to a customer on December 27 of the current year, with the understanding that they would be returned to Plummer on January 15 of the next year. Because these goods were not on hand, they were excluded from the inventory count. c. On December 31 of the current year, goods in transit to customers, with terms FOB shipping point. amounted to $6,500 (expected delivery date January 10 of the next year). Because the goods had been shipped, they were excluded from the physical inventory count. d. On December 31 of the current year, goods in transit to customers, with terms FOB destination, amounted to $1.500 (expected delivery date January 10 of the next year). Because the goods had been shipped, they were excluded from the physical inventory count. Required: Plummer's accounting policy requires including in inventory all goods for which it has title. Note that the point where title (ownership) changes hands is determined by the shipping terms in the sales contract. When goods are shipped "FOB shipping point," title changes hands at shipment and the buyer normally pays for shipping. When they are shipped "FOB destination," title changes hands on delivery, and the seller normally pays for shipping. Begin with the $34,000 inventory amount and compute the correct amount for the ending inventory. Explain the basis for your treatment of each of the preceding items (Hint: Set up three columns: Item, Amount, and Explanation.)

Answer 1

1. As per the generally accepted accounting policies and practices, inventory should be valued based on the ownership of the goods and not based on the physical stock available, therefore the treatment will be as follows,
   1. As the terms are FOB shipping point, ownership will be changed when the goods are shipped, as the goods are in transit ownership is already got transferred, therefore these should be included in the inventory. $700 should be included.
   2. When goods are sent in a sample, ownership will get transferred once the samples are accepted by the receiver, as the customer didn't confirm as to the acceptance the ownership is not yet transferred, therefore goods worth $1800 should be included in stock.
   3. The goods were already shipped and terms are FOB Shipping point means the ownership is already transferred, and therefore these stock should not be included in physical inventory.
   4. In this case the FOB terms are destination and hence ownership will be transferred once goods are delivered to the customer, since the goods are still in transit, they should be included in our inventory, $1500 should be included in our inventory.
2. Therefore the correct amount for ending inventory is $34000+$1500+$1800+$700=$38000.