Analyzing Items to Be Included in InventoryBased on its physical count of inventory in its...

Analyzing Items to Be Included in Inventory

Based on its physical count of inventory in its warehouse at year-end, December 31, 2011, Madison Company planned to report inventory of $34,500. During the audit, the independent CPA developed the following additional information:

a. Goods from a supplier costing 5700 are in transit with UPS on December 31, 2011. The terms are FOB shipping point (explained in the “Required” section). Because these goods had not yet arrived, they were excluded from the physical inventory count.

b. Madison delivered samples costing $1,800 to a customer on December 27, 2011, with the understanding that they would be returned to Madison on January 15, 2012. Because these goods were not on hand, they were excluded from the inventory count.

c. On December 31, 2011, goods in transit to customers, with terms FOB shipping point, amounted to $6,500 (expected delivery date January 10, 2012). Because the goods had been shipped, they were excluded from the physical inventory count.

d. On December 31, 2011, goods in transit to customers, with terms FOB destination, amounted to $1,500 (expected delivery date January 10, 2012). Because the goods had been shipped, they were excluded from the physical inventory count.

Required:

Madison’s accounting policy requires including in inventory all goods for which it has title. Note that the point where title (ownership) changes hands is determined by the shipping terms in the sales contract. When goods are shipped “FOB shipping point.” title changes hands at shipment and the buyer normally pays for shipping. When they are shipped “FOB destination.” title changes hands on delivery, and the seller normally pays for shipping. Begin with the $34,500 inventory amount and compute the correct amount for the ending inventory. Explain the basis for your treatment of each of the preceding items. (Hint: Set up three columns: Item. Amount, and Explanation.)