Headland Bank and Trust is considering giving Alou Company a loan. Before doing

Question

Headland Bank and Trust is considering giving Alou Company a loan. Before doing so, management decide that further discussions with Alou’s accountant may be desirable. One area of particular concern is the inventory account, which has a yearend balance of £311,960. Discussions with the accountant reveal the following.

Determine the correct inventory amount on December 31.

1. Alou sold goods costing £31,950 to Comerico Company, FOB shipping point, on December 28. The goods are not expected to arrive at Comerico until January 12. The goods were not included in the physical inventory because they were not in the warehouse. 2. The physical count of the inventory did not include goods costing £98,820 that were shipped to Alou FOB destination on December 27 and were still in transit at year-end. 3. Alou received goods costing £19,370 on January 2. The goods were shipped FOB shipping point on December 26 by Grant Co. The goods were not included in the physical count. 4. Alou sold goods costing £35,550 to Emerick Co., FOB destination, on December 30. The goods were received at Emerick on January 8. They were not included in Alous physical inventory. 5. Alou received goods costing £40,400 on January 2 that were shipped FOB destination on December 29. The shipment was a rush order that was supposed to arrive December 31. This purchase was included in the ending inventory of £311,960.

Explanation / Answer

Solution - Calculation of correct Inventory amount

Adjustments:

(1) - No treatment

Goods should be included in inventory since terms of goods are on FOB destination point

ownership of goods is not transferred till the year end and hence these are included in inventory

Explanation :-

Concept of FOB Destination, FOB Shipping Point.

Fob Shipping Point = Ownership of goods is transferred to buyer when goods are shipped in carrier. Hence seller will not be the owner at this point and will not include the goods in his books as inventory since the ownership of goods is transferred to buyer and seller bears no risks and rewards related to goods. Even the buyer bear the costs of transportation

Fob Destination = Ownership of goods is transferred to buyer when goods reach its destination i.e. buyer place. In such cases transportation costs is borne by seller. Such goods form part of seller inventory until such goods reach its destination. till goods reach its destination, risks and reward related to goods is borne by seller.

Particulars Amount Explanation Inventory value given £311960

Adjustments:

(1) - No treatment

£0 Already correctly treated by company but reason was wrong. Goods are in warehouse or not is not a situation to decide on it. Goods are not included in inventory because goods are sold FOB shipping point (2) - No Treatment £0 Goods are already correctly treated by company since Terms of goods are FOB Destination point hence goods will transferred when these will be received by company (3) - Add £19370 Goods become inventory of buyer at the time of shipping iteself since these are on terms of FOB Shipping point (4) - Add £35550

Goods should be included in inventory since terms of goods are on FOB destination point

ownership of goods is not transferred till the year end and hence these are included in inventory

(5) - Less £40400 Goods are purchases on terms of FOB destination point. Hence ownership of goods will be transferred to Alou on January 2, hence goods are not inventory of alou till the year end hence deducted Correct Inventory Amount £326480

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