Question

Farley Bains, an auditor with Nolls CPAs, is performing a review of Oriole Company’s Inventory account. Oriole did not have a good year, and top management is under pressure to boost reported income. According to its records, the inventory balance at year-end was $812,010. However, the following information was not considered when determining that amount.

Prepare a schedule to determine the correct inventory amount. (Show amounts that reduce inventory with a negative sign or parenthesis e.g. -45 or parentheses e.g. (45).)

		Ending inventory-as reported		$Enter a dollar amount
1.		Included in the company’s count were goods with a cost of $213,230 that the company is holding on consignment. The goods belong to Nader Corporation.		Enter a dollar amount
2.		The physical count did not include goods purchased by Oriole with a cost of $38,730 that were shipped FOB shipping point on December 28 and did not arrive at Oriole’s warehouse until January 3.		Enter a dollar amount
3.		Included in the Inventory account was $18,390 of office supplies that were stored in the warehouse and were to be used by the company’s supervisors and managers during the coming year.		Enter a dollar amount
4.		The company received an order on December 29 that was boxed and was sitting on the loading dock awaiting pick-up on December 31. The shipper picked up the goods on January 1 and delivered them on January 6. The shipping terms were FOB shipping point. The goods had a selling price of $37,670 and a cost of $30,950. The goods were not included in the count because they were sitting on the dock.		Enter a dollar amount
5.		Included in the count was $46,500 of goods that were parts for a machine that the company no longer made. Given the high-tech nature of Oriole’s products, it was unlikely that these obsolete parts had any other use. However, management would prefer to keep them on the books at cost, “since that is what we paid for them, after all.”		Enter a dollar amount
		Correct inventory		$Enter a dollar amount

Answer 1

Solution

Oriole Company

Schedule to determine the correct inventory account:

	Ending inventory as reported	$812,010
1	Less: Goods held on consignment	($213,320)
2	Add: goods purchased on FOB shipping terms	$38,730
3	Less: office supplies	($18,390)
4	Add: goods sold on FOB shipping terms but not picked up before December 31	$30,950
5	Less: obsolete inventory	($46,500)
	Ending inventory at corrected amount	$603,480

Explanation:

1. For goods held on consignment, Oriole acts an agent and hence not owner of the goods. So, the value should not be included in the ending inventory.
2. The ownership of goods purchased on FOB shipping terms is transferred to the buyer at the shipping point and hence though the goods are not received, these must be included in the ending inventory.
3. Office Supplies do not form part of inventory, these items should be reported separately under the account office supplies. Hence, the ending inventory value should be reduced by the 18,390.
4. The goods sold on FOB shipping terms and awaiting pickup are not picked up as on December 31. Hence, the goods belong to the company and should be included in the ending inventory at December 31 at cost $30,950.
5. Though the company paid for the cost of the parts, the parts have become obsolete and such obsolete items should not be included in the inventory.