Question

1. Jen Psaki, an auditor with Martinez CPAs, is performing a review of Sergei Company's inventory account. Sergei's did not have a good year and top management is under pressure to boost reported income. According to its records, the inventory balance at year-end was $835,000. However, the following information was not considered when determining that amount.

• Included in the company's count were goods with a cost of $200,000 that the company is holding on consignment. The goods belong to Bosnia Corporation.
• The physical count did not include goods purchased by Sergei with a cost of $40,000 that were shipped FOB shipping point on December 28 and did not arrive at Sergei's warehouse until January 3.
• Included in the inventory account was $15,000 of office supplies that were stored in the warehouse and were to be used by the company's supervisors and managers during the coming year.
• The company received an order on December 28 that was boxed and was sitting on the loading dock awaiting pick-up on December 31. The shipper picked up the goods on January 1 and delivered them on January 6. The shipping terms were FOB shipping point. The goods had a selling price of $40,000 and a cost of $30,000. The goods were not included in the count because they were sitting on the dock.
• On December 29, Sergei shipped goods with a selling price of $100,000 and a cost of $80,000 to Oman Sales Corporation FOB shipping point. The goods arrived on January 3. Oman Sales had only ordered goods with a selling price of $10,000 and a cost of $8,000. However, a Sergei's sales manager had authorized the shipment and said that if Oman wanted to ship the goods back next week, it could.
• Included in the count was $30,000 of goods that were parts for a machine that the company no longer made. Given the high-tech nature of Sergei's products, it was unlikely that these obsolete parts had any other use. However, management would prefer to keep them on the books at cost, “since that is what we paid for them, after all.”

INSTRUCTIONS: Prepare a schedule to determine the correct inventory amount. Provide explanations for each item above, saying why you did or did not make an adjustment for each item.

Answer 1

Inventory balance at year-end $		835000
Adjustments:
a. Goods on consignment-Bosnia Corp.	-200000
b. Goods purchased FOB shipping point	40000
c. Office supplies	-15000
d. Goods sold FOB shipping point	30000
e. Cost of sales incorrectly recorded	72000
f. Obsolete parts	-30000	-103000
Correct inventory balance $		732000

Explanations:

a. Goods under consignment are included in the inventory of the consignor and not the consignee hence excluded.

b. Title to goods purchased FOB shipping point is transferred to Sergei once the goods have been shipped even though not yet received at year-end. Hence, same need to be included in the year-end inventory.

c. To be excluded from inventory and shown as office supplies.

d. Goods sold FOB shipping point and picked on January 1 should be included in the inventory.

e. The cost of the goods shipped incorrectly should be included in the inventory.

f. Obsolete parts should be written down.