Question

First Bank is considering giving Oriole Company a loan. First, however, it decides that it would be a good idea to have further discussions with Oriole’s accountant. One area of particular concern is the inventory account, which has a December 31 balance of $279,000. Discussions with the accountant reveal the following:

1.The physical count of the inventory did not include goods that cost $98,000 that were shipped to Oriole, FOB shipping point, on December 27 and were still in transit at year end.

2.Oriole sold goods that cost $38,000 to Ivanhoe, FOB destination, on December 28. The goods are not expected to arrive at their destination in India until January 12. The goods were not included in the physical inventory because they were not in the warehouse.

3.On December 31, Grouper had $29,000 of goods held on consignment for Oriole. The goods were not included in Oriole’s ending inventory balance.

4.Oriole received goods that cost $27,500 on January 2. The goods were shipped FOB shipping point on December 26 by Sheffield. The goods were not included in the physical count.

Question:

Determine the correct inventory amount at December 31.

Answer 1

Particulars	Amount	Remarks
Balance of Inventory as on 31st December	279,000
Goods shipped to Oriole FOB Shipping point on December 27	98,000	If the inventory is shipped free on board shipping point, the business is the legal owner of the inventory as soon as the supplier ships it.Hence 98,000 should be added to inventory as they were shipped before the cutoff date (i.e 31st December)
Goods sold 38000 to Ivanhoe, FOB destination on December 28 in transit	38,000	If the inventory is shipped free on board destination, the business is the legal owner of the inventory until it actually reaches the buyer's business.Hence 38,000 should also be included in the inventory since they have not reached the buyer within the cutoff date of 31st December
Goods held by Grouper to be sold on consignment basis	29,000	Products held on consignment are included in the consignor's inventory, not the consignee's, even though they are not in the consignor's physical possession.In this case Oriole being the consignor should also add the goods sent on consignment to its inventory balance
Goods shipped to Oriole FOB Shipping point on December 26	27,500	Even though the goods are received only on 2nd January they are to be added to the inventory since they have been shipped by the seller before the cutoff date of 31st December
Correct Inventory Balance as on 31st December	471,500

Note - For goods in transit it is important to note the terms of Shipping arrangement and for Goods sent on consignment inventory balance of the consignor should always include them.