Inventory Flashcards
- On December 28, 2005, Kerr Manufacturing Co. purchased goods costing $50,000. The terms were FOB destination. Some of the costs incurred in connection with the sale and delivery of the goods were as follows:
Packaging for shipment $1,000
Shipping 1,500
Special handling charges 2,000
These goods were received on December 31, 2005. In Kerr’s December 31, 2005 balance sheet, what amount of cost for these goods should be included in inventory?
A; 50,000
Kerr will pay only $50,000 for the goods. None of the other costs listed are incurred by Kerr. Rather, the seller will incur those costs.
Even the shipping costs are borne by the seller because the terms are FOB destination. This means that title does not transfer to the buyer (Kerr) until the goods reach the destination. The seller owned the goods in transit and therefore incurred the transportation cost. Kerr’s recorded cost is $50,000.
- Herc Co.’s inventory on December 31, 2005 was $1,500,000, based on a physical count priced at cost, and before any necessary adjustment for the following:
Merchandise costing $90,000, shipped FOB shipping point from a vendor on December 30, 2005, was received and recorded on January 5, 2006.
Goods in the shipping area were excluded from inventory although shipment was not made until January 4, 2006. The goods, billed to the customer FOB shipping point on December 30, 2005, had a cost of $120,000.
What amount should Herc report as inventory in its December 31, 2005, balance sheet?
A; $1,710,000
The correct ending inventory balance is $1,710,000 ($1,500,000 + $90,000 + $120,000).
The $90,000 of merchandise is included because it was shipped before year-end and the title was transferred to Herc at the shipping point (before year-end). The $120,000 also is included because the goods have not been shipped. The FOB designation is irrelevant because the goods have not yet reached a common carrier.
Trick question! make sure you read! It states that “goods billed to customer FOB shipping point” does not say “goods shipped”. Therefore the FOB designation is irrelevant.
- The following two inventory items were purchased as a group in a liquidation sale for $1,000.
Replacement Carrying Value Item Cost On Seller's Books A $400 $390 B 700 755 The firm purchasing the inventory records item A at what amount?
A; $364
