Question

Question:

The inventory ledger account balance on June 30, 2019, was $15,300, and net realisable value for each product line exceeded the cost. The cost of inventory on hand June 30, 2019, determined by physical count, however, was only $15,156. In investigating the reasons for the discrepancy, Boodja-Dooga Ltd discovered the following.

• Goods costing $174 were sold for $220 (GST Inclusive) on June 26, 2019, on FOB destination (seller pays shipping) shipping terms. The goods were in transit on June 30, 2019. The sale was recorded on June 26, 2019, and the goods were not included in the physical count.
• Goods costing $198 (GST Inclusive) were ordered on June 24, 2019, on FOB shipping point shipping terms. The goods were delivered to the transport company on June 27, 2019. The purchase was recorded on June 27, 2019, but, as the goods had not yet arrived, the goods were not included in the physical count.
• Goods costing $280 held on consignment for Richmond Ltd were included in the physical count.

Required

Prepare any journal entries required on June 30, 2019, to correct any errors and to adjust the inventory account. No Post Ref required. Refer to the provided Chart of Accounts for the appropriate account names.

Date	Account	Post Ref	Debit	Credit
2019
	To record reversal of error in recording of sales of item on FOB Destination shipping terms
	To record items “sold” back into inventory
	To record inventory lost or missing

Answer 1

Because of the dynamic relationship between cost of goods sold and merchandise inventory, errors in inventory counts have a direct and significant impact on the financial statements of the company. Errors in inventory valuation cause mistaken values to be reported for merchandise inventory and cost of goods sold due to the toggle effect that changes in either one of the two accounts have on the other.

Reconciliation Journal Entry

Cost of Goods Sold---------Dr. 144

Merchandise Inventory-------------- 144

(Being Inventory adjust to match the physical Count.)