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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Items to Be Included in Inventory As the auditor of Hayes Company for the year ended December 31, 2019, you found the following transactions occurred near its closing date:

  1. 1. Merchandise received on January 8, 2020, and costing $800 was recorded as inventory on January 8, 2020. An invoice on hand showed the shipment was made FOB shipping point on December 31, 2019. Because the merchandise was not on hand at December 31, 2019, it was not included in the 2019 inventory balance.
  2. 2. A product costing $600 was in Hayes’s shipping room when the physical inventory was taken. It was not included in the inventory because it was marked “Hold for customer’s shipping instructions.” Investigation revealed that the customer’s order was dated December 18, 2019 but that the case was shipped and the customer billed on January 10, 2020.
  3. 3. A machine, made to order for a customer, was finished on December 31, 2019, The customer had inspected it and was satisfied with it. The customer was billed in full for $2,000 on that date. The machine was excluded from inventory, although it was shipped on January 2, 2019.
  4. 4. Merchandise costing $800 was received on December 27, 2019, but a purchase was not recorded. The goods were “on consignment from Milliken Company.”
  5. 5. Merchandise costing $4,000 was received on January 2, 2020, and the related purchase invoice was recorded on January 5, 2020. The invoice showed that the shipment was made on December 29, 2019, FOB destination.

Required:

For each situation, state whether Hayes should include the merchandise in its inventory. Give your reason for the decision on each item.

To determine

Explain whether Company H should include the merchandise in its inventory for each situation.

Explanation

FOB destination: When the seller bears the freight charges for the delivery of merchandise from the point of origin, it is referred to as FOB (freight-on-board) destination. So, the title of ownership would be held with the buyer only at the destination point.

FOB shipping point: When the buyer bears the freight charges for the delivery of merchandise from the point of origin, it is referred to as FOB (freight-on-board) shipping point. So, the title of ownership is held with the buyer, from the shipping point itself.

Situation 1: Merchandise was received on January 8, 2020, for $800, which was recorded as inventory on January 8, 2020. An invoice on hand exhibited the shipment was made FOB shipping point on December 31, 2019. It was not included in inventory balance since; the merchandise was not on hand at December 31, 2019.

Justification: The inventory is owned by Company H on December 31, 2016, when it was shipped FOB shipping point. Hence, it should be included in inventory at December 31, 2016.

Situation 2: A product costing $600 was in shipping room of Company H when the physical inventory was taken. It was not involved in the inventory because it was marked “Hold for customer’s shipping instructions.” Investigation revealed that the customer’s order was dated December 18, 2019 but that the case has been shipped and the customer had been billed on January 10, 2020.

Justification: In this case, the sale of product did not take place until January 10, 2020...

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