Question

Reagan Corporation is a wholesale distributor of truck replacement parts. Initial amounts taken from Reagan's records are as follows: Inventory at December 31 (based on a physical count of goods in Reagan's warehouse on December 31) $1,400,eee Accounts payable at December 31: Vendor Baker Company Charlie Company Dolly Company Eagler Company Full Company Greg Company Accounts payable, December 31 Sales for the year Terms 2%, 10 days, net 30 Net 30 Net 30 Net 3e Net 30 Net 30 Amount $ 295,000 240. eee 338,888 255,888 $1,120.ee $9,750,000 Additional Information: 1. Parts held by Reagan on consignment from Charlie, amounting to $230,000, were included in the physical count of goods in Reagan's warehouse and in accounts payable at December 31. 2. Parts totaling $37.000, which were purchased from Full and paid for in December, were sold in the last week of the year and appropriately recorded as sales of $43,000. The parts were included in the physical count of goods In Reagan's warehouse on December 31 because the parts were on the loading dock waiting to be picked up by customers. 3. Parts In transit on December 31 to customers, shipped f.o.b. shipping point on December 28, amounted to $64.000. The customers recelved the parts on January 6 of the following year. Sales of $70,000 to the customers for the parts were recorded by Reagan on January 2 4. Retailers were holding goods on consignment from Reagan, which had a cost of $360,000 and a retail value of $400,000. 5. Goods were in transit from Greg to Reagan on December 31. The cost of the goods was $40,000, and they were shipped fo.b. shipping point on December 29. 6. A freight bill in the amount of $3.500 specifically relating to merchandise purchased in December, all of which was still in the Inventory at December 31, was received on January 3. The freight bill was not included in either the Inventory or in accounts payable at December 31. 7. All the purchases from Baker occurred during the last seven days of the year. These items have been recorded in accounts payable and accounted for in the physical Inventory at cost before discount. Reagan's policy is to pay Invoices in time to take advantage of all discounts, adjust Inventory accordingly, and record accounts payable net of discounts. Required: Complete the schedule of adjustments to the Initial amounts which is shown below. (Amounts to be deducted should be indicated with a minus sign.) Inventory $ 1.400.000 Accounts Payable Sales 1.120.000 $ 9.750,000 $ Initial amounts Adjustments increase (decrease) 1. 3. L Total adjustments Adjusted amounts o l 1.400.000 o l 1,120,000 $ $ $ 9,750,000

Answer 1

Reagan Corporation
Schedule of adjustments to initial amounts
	Inventory	Accounts Payable	Sales
Initial amounts	$1,400,000	$1,120,000	$975,000
Adjustments - increase(decrease)
Consignment stock of Charlie included in Inventory & Accounts payable	($230,000)	($230,000)
Parts sold in December but included in Inventory	($37,000)
Sales of December recorded in January			$70,000
Goods lying with Retailers	$360,000
Goods in transit from Greg	$40,000	$40,000
Freight on merchandise purchased in December & lying in stock	$3,500	$3,500
Discount on inventory from Baker	($0)	$ 0
Total adjustments	$136,500	($186,500)	$70,000
Adjusted amounts	$1,536,500	$933,500	$1,045,000

Working notes to the schedule of adjustments:

1. Stocks held on consignment are not owned by Reagan but are under the ownership of the Consignor,i.e, Charlie even though they are in the physical possession of Charlie. He holds them as an agent of Charlie. Therefore, the value of the stock as well as the related amount booked in the accounts payable general ledger will have to be reduced from the respective accounts.

2.Since the parts totaling $ 37,000 were sold in the last week of December,the ownership of the same was transferred from Reagan to the buyer.Hence, this transaction must be included in the sales of December irrespective of the fact as to whether the goods have been delivered or not. Hence,the sales of December would increase by $ 37,000

3. Since, the sales is F.O.B. the ownership of the goods is transferred as soon as the goods leave the premises of Reagan. Sales was made on Dec 28 and irrespective of the fact that the customer received them on Jan 06,the sales would be recorded in Dec. Hence,the sales would increase by $ 70,000.However, there would be no effect on inventory as the goods were in transit on Dec 31,we assume that the they were not included in the Dec 31 inventory.

4. The goods held by the retails on consignment were under the ownership of Reagan and these goods shall be included in the Dec 31 Inventory of Reagan at cost. Hence, for this adjustment, the inventory would increase by $ 360,000.

5.Since the goods were purchased from Greg on F.O.B. basis on Dec 29 and were in the transit on Dec 31,the ownership of the goods on Dec 31 is with Reagan. Hence, the inventory will increase by $ 40,000 and Accounts payable will also increase by $ 40,000

6. Freight costs directly related to an inventory item is added to the purchase price of that item to derive the landed cost of the inventory. Since,the particular item is included in the Dec 31 inventory,the relevant freight cost should also be included in Dec 31 to derive the correct value of inventory.Hence, both inventory and accounts payable will increase by $ 3,500.

7. The account payable balance for Baker as on Dec 31 is $ 295,000.The payment terms are 2% 10 days.Reagan will pay the amount within 10 days of the purchase to avail the discount.The value of discount would be $ 295,000*2% = $ 5,900.However this discount would be earned once the payment is made. Since,the date of payment would fall after Dec 31,the effect of this discount would not be considered in adjustments for Dec 31.Prudence in accounting concept says that incomes and gains should only be recognized once they have been actually earned.