Analyzing Items to Be Included in In v entory

Reggie Company has just completed a physical inventory count at year-end, December 31, 2010. Only the items on the shelves, in storage, and in the receiving area were counted and costed on a FIFO basis. The inventory amounted to $65,000. During the audit, the independent CPA developed the following additional information:

a. Goods costing $750 were being used by a customer on a trial basis and were excluded from the in- ventory count at December 31, 2010.

b. Goods in transit on December 31, 2010, from a supplier, with terms FOB destination (explained in the “Required” section), cost $900. Because these goods had not arrived, they were excluded from the physical inventory count.

c. On December 31, 2010, goods in transit to customers, with terms FOB shipping point, amounted to $1,300 (expected delivery date January 10, 2011). Because the goods had been shipped, they were excluded from the physical inventory count.

d. On December 28, 2010, a customer purchased goods for cash amounting to $2,650 and left them “for pickup on January 3, 2011.” Reggie Company had paid $1,590 for the goods and, because they were on hand, included the latter amount in the physical inventory count.

e. On the date of the inventory count, the company received notice from a supplier that goods ordered earlier at a cost of $2,550 had been delivered to the transportation company on December 27, 2010; the terms were FOB shipping point. Because the shipment had not arrived by December 31, 2010, it was excluded from the physical inventory.

f. On December 31, 2010, the company shipped $850 worth of goods to a customer, FOB destination. The goods are expected to arrive at their destination no earlier than January 8, 2011. Because the goods were not on hand, they were not included in the physical inventory count.

g. One of the items sold by the company has such a low volume that the management planned to drop it last year. To induce Reggie Company to continue carrying the item, the manufacturer-supplier pro- vided the item on a “consignment basis.” This means that the manufacturer-supplier retains ownership of the item, and Reggie Company (the consignee) has no responsibility to pay for the items until they are sold to a customer. Each month, Reggie Company sends a report to the manufacturer on the num- ber sold and remits cash for the cost. At the end of December 2010, Reggie Company had six of these items on hand; therefore, they were included in the physical inventory count at $950 each.

Required:

Assume that Reggie’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 “F.O.B. shipping point,” title changes hands at shipment and the buyer normally pays for shipping. When they are shipped “F.O.B. destination,” title changes hands on delivery, and the seller normally pays for shipping. Begin with the $65,000 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.)

 

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