Question

Max's 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 Max report as inventory in its December 31, 2005, balance sheet?

1.$1,500,000

2.$1,590,000

3.$1,620,000

4.$1,710,000

On October 20, 2005, Heavy Co. consigned 40 freezers to Holden Co. for sale at $1,000 each and paid $800 in transportation costs. On December 30, 2005, Holden reported the sale of 10 freezers and remitted $8,500. The remittance was net of the agreed 15% commission.
What amount should Heavy recognize as consignment sales revenue for 2005?

1.$7,700

2.$8,500

3.$9,800

4.$10,000

Answer 1

Answer:

Option (4) $1,710,000 is correct
Before adjustment, the inventory based on a physical count was $1,500,000. The $90,000 of merchandise shipped FOB shipping point by a vendor on 12/30/2005 should also be included in Herc’s 12/31/2005 inventory because Herc, the buyer, owns the goods while in transit under these terms. The goods in the shipping area (cost, $120,000) are also owned by Herc because they were not shipped until year 3 and Herc still retains the risks of ownership until that point. Therefore, 12/31/2005 inventory is $1,710,000 ($1,500,000 + $90,000 + $120,000).

Option (4) $10,000 is correct
Sales revenue to be recognised by flip = 8500 / (1-.15) = 8500 / .85 = $ 10,000