Question

3. As a new staff accounting, your manager sends you to Pittsburg to observe and verify the inventory of the Pittsburg branch of one of your clients. You arrive on Thursday, December 30, and find that the inventory procedures have just been started. You spot a railway car on the sidetrack at the unloading door and ask the warehouse superintendent, John Reacher, how he plans to inventory the contents of the car. He responds, "We are not going to include the contents in the inventory." Later in the day, you ask the bookkeeper for the invoice on the carload and the related freight bill. The invoice lists the various items, prices, and extensions of the goods in the car. You note that the carload was shipped December 24 from Sonoma, AZ, f.o.b. shipping point, and that the total invoice price of the goods in the car was $35,300. The freight bill called for a payment of $1,500. Terms were net 30 days. In checking with the accountant in Pittsburg, you find that this invoice is to be held for recording in January. Write a short professional memo to your audit manager including the following: a. Discussion of any liability that should be recorded at December 31. W b. Specify any journal entry needed to reflect any needed accounting adjustment. c. Discuss manager motivations for wanting to postpone the transaction until the next year. d. Include the following: I. Proper memo format (To/From / Date / Subject II. An introductory paragraph about what you found III. A discussion of proper GAAP for this situation IV. A short paragraph discussing possible motivations for delaying items until the next year A paragraph recommending journal entries you believe are needed to follow proper GAAP. Assume all items are material.

Answer 1

Important point to note in relates to above point :

Inventory – Physical verification as on 30^th Dec

Identified by new accountant that a railway Car on the side track at unloading door . On further deep dive accountant noticed that carload was shipped on Dec 24 ion FOB shipping point . and total Invoice Value $ 35,300 . the freight bill called for a payment $ 1500.

Important point – Accountant is not ready to consider the above matter in Inventory Dec ’31. Accountant wants to accounted the same in January .

To

Audit Manager ,

Sub- Inventory counting and treatment of Inventory despatched FOB Shipping Point Date - 31st Dec

While reviewing Inventory Physical verification as on Dec end , I noticed that Goods despatched from Sonoma , AZ as on 24^th December on FOB Shipment basis , As you are aware that FOB is one of the Incoterm we used during shipment of goods . The above transaction has been done on FOB shipping Point and FOB shipping terms explain that the buyers takes delivery of goods being shipped to it by Supplier once goods leave the seller place . Under FOB shipping point method, Seller immediately recognised revenue but buyer used to consider it as Goods In Transit and consider part of Inventory .

We are not considering the above Inventory into our Physical Inventory count but we should be considered the same in our Financial under Current asset . We also simultaneously account Liability towards Liability . We need to follow correct GAAP principle relates to Inventory method and valuation . We need to account create Liability to wards supplier and towards Fright ( $ 1500) directly . Journal Entry – Freight in delivery A/c- Debit - $ 1500 / Freight in Account payable -Credit $1500

We will pass relevant reversal entry in January and account actual payment entry towards supplier . In the month of January, We will physically received this goods and consider the same into Inventory account .

Hope you are ok with above accounting treatment . Please let me know for any further challenge as on Year end .

Thanks

New Accountant