Question

Whose Inventory is it?

You were asked to travel to Milwaukee to observe and verify the inventory of the Milwaukee branch of one of your clients. When you arrive on Thursday, December 30, and find that the inventory procedures have just been started. You spot a railway car on the sidetrack at the unloading door and ask the warehouse superintendent, Buck Rogers, how he plans to inventory the contents of the car. He responds, “We are not going to include the contents in the inventory.”

Later in the day, you ask the bookkeeper for the invoice on the carload and the related freight bill. The invoice lists the various items, prices, and extensions of the goods in the car. You note that the carload was shipped December 24 from Albuquerque, f.o.b. Albuquerque, and that the total invoice price of the goods in the car was $35,300. The freight bill called for a payment of $1,500. Terms were net 30 days. The bookkeeper affirms the fact that this invoice is to be held for recording in January.

Does your client have a liability that should be recorded at December 31? Discuss.

For what possible reason(s) might your client wish to postpone recording the transaction?

Answer 1

FOB Shipping Point - In this case, the ownership passes to the buyer once the product is shipped.

In this case, Carload was shipped December 24 from Albuquerque, FOB Albuquerque, that is the ownership is transferred to Milwaukee branch.

In this case, the carload has to be included in the inventory value for the year end.

1. Yes, the client have a liability that should be recorded at December 31 for $36,800, the journal entry to be passed is, Debit the Inventory account and credit the Accounts Payable Account.

2. The possible reasons for the client to wish postponement of recording the transaction:

• To show less amount of accounts payables.
• To manipulate the current ratio.
• To show less net profit.