Question

Desert, Co. uses a perpetual inventory system. As of December 31, 2019, Desert reported $250,000 of...

Desert, Co. uses a perpetual inventory system. As of December 31, 2019, Desert reported $250,000 of inventory. Upon reviewing the company's records, the auditor noticed the following items which may have been recorded incorrectly. Assume all purchases and sales are made on account.

1) Desert sold goods with a cost of $40,000 to Jungle, Inc. on terms FOB shipping point on December 30th. As of December 31st, the goods were still on the loading dock awaiting pick-up from UPS. However, because they were not in the warehouse, they were not included in the calculation of inventory. Determine the error (if any) on Ending Inventory,

Options: Overstated, Understated, or no error

Business   Accounting   
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Answer #1

When goods are sold under term FOB shipping point, the sale is recorded by the seller when the goods are loaded into the carrier from the shipping point.

Under the present situation the goods are still on the loading dock and are not loaded in the buyers carrier. The goods should be included in the value of the sellers inventory.

Actual value of inventory = $250,000 + $40,000 = $290,000

Recorded value = $250,000

Inventory is undervalued by $40,000

Understated.

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