At December 31, 2014, Robert McCoy Corporation reported current assets of $384,8
ID: 2459139 • Letter: A
Question
At December 31, 2014, Robert McCoy Corporation reported current assets of $384,800 and current liabilities of $207,400. The following items may have been recorded incorrectly.
1. Goods purchased costing $26,680 were shipped f.o.b. shipping point by a supplier on December 28. McCoy received and recorded the invoice on December 29, 2014, but the goods were not included in McCoy’s physical count of inventory because they were not received until January 4, 2015.
2.Goods purchased costing $16,150 were shipped f.o.b. destination by a supplier on December 26. McCoy received and recorded the invoice on December 31, but the goods were not included in McCoy’s 2014 physical count of inventory because they were not received until January 2, 2015.
3. Goods held on consignment from Tyler Durden's Company were included in McCoy’s December 31, 2014, physical count of inventory at $15,150.
4. Freight-in of $4,880 was debited to advertising expense on December 28, 2014.
1. Goods purchased costing $26,680 were shipped f.o.b. shipping point by a supplier on December 28. McCoy received and recorded the invoice on December 29, 2014, but the goods were not included in McCoy’s physical count of inventory because they were not received until January 4, 2015.
2.Goods purchased costing $16,150 were shipped f.o.b. destination by a supplier on December 26. McCoy received and recorded the invoice on December 31, but the goods were not included in McCoy’s 2014 physical count of inventory because they were not received until January 2, 2015.
3. Goods held on consignment from Tyler Durden's Company were included in McCoy’s December 31, 2014, physical count of inventory at $15,150.
4. Freight-in of $4,880 was debited to advertising expense on December 28, 2014.
Explanation / Answer
1) When goods are delivered in terms of FOB Shipping point, the goods in transit sat the end of the year, hould be reported as the inventory by the buyer. Hence the goods costing $26,680 should be included in the inventory of the comapny
2) When goods are sold on the terms of FOB destination, the goods should be reported as inventory by the seller, unless and until the goods are delivered to the buyer. So the goods in transit at the end of the year, sold under the terms of FOB destination, should not be included in the inventory by the buyer. Here the goods costing $16,150 has rightly been excluded by the corporation from its year end inventory.
3) Goods costing $ 15,150 sent on consignment to Mcgill by the Caludia company, should be excluded from the year end inventory of the Mcgill's corporation.
4) Freight in is reagrded as the part of the cost of goods purchased and hence should be added to the value of the year end inventory.
Current Ratio of the corporation before the correction were made
= Current asset / current liability = $384,800 / $207,400 = 1.86 : 1
The revised Current Asset of the corporation as on 31st Dec. 2013
= $ 384,800 + $26,680 + $4880 = $416,360
Current liability as on 31st dec. 2013 = $207,400
Therefore Current Ratio = Current asset / current liability = $407120 / $202800 = 2.01 : 1
As the Freight in expense charged as advertisement expense instead of increasing the value of inventory by that amount, After the correction the Income Before Tax of the comapany will be adjusted up by $ 4,880
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