Question

In your audit of Newman Company, you find that a physical inventory on December 31, 2019, showed merchandise with a cost of $399,450 was on hand at that date. You also discover the following items were all excluded from the $399,450.

1. Merchandise costing $52,310 shipped by a vendor f.o.b. shipping point on December 31, 2017, and received by Newman on January 5, 2018.

2. Merchandise costing $75,730 shipped by a vendor f.o.b. destination on December 30, 2017, and received by Newman on January 4, 2018.

3. Merchandise costing $42,890 which was shipped by Newman f.o.b. shipping point to a customer on December 29, 2017. The customer was scheduled to receive the merchandise on January 2, 2018.

4. Merchandise costing $39,580 which was shipped by Newman f.o.b. destination to a customer on December 31, 2017. The customer was expected to receive the merchandise on January 6, 2018.

5. Merchandise of $61,320 which is held by Newman on consignment. The consignor is the Max Suzuki Company.

For each of the items 1- 5, determine whether it should be Added In (A) or Ignored (ok as is) (I). For each of the above items place an A or an I beside the number below.

1. __________________ 2. __________________ 3. __________________ 4. __________________ 5. __________________

Answer 1

Note:1: The term FOB is an abbreviation of free on board.

If goods are shipped FOB destina­tion, transportation costs are paid by the seller and title does not pass until the carrier delivers the goods to the buyer. These goods are part of the seller’s inventory while in transit.

If goods are shipped FOB shipping point, transportation costs are paid by the buyer and title passes when the carrier takes possession of the goods. These goods are part of the buyer’s inventory while in transit.

The terms FOB destination and FOB shipping point often indicate a specific location at which title to the goods is transferred, such as FOB Denver. This means that the seller retains title and risk of loss until the goods are delivered to a common carrier in Denver who will act as an agent for the buyer. The rationale for these determi­nations originates in agency law, since transfer of title is conditioned upon whether the car­rier with physical possession of the goods is acting as an agent of the seller or the buyer.

Note:2:

If the consignee can't sell the products, it returns them to the consignor. If it sells them, it remits the selling price to the consignor and takes a commission. Products held on consignment are included in the consignor's inventory, not the consignee's, even though they are not in the consignor's physical possession.

in this example consignor is the Max Suzuki Co. and these goods will be included in their inventory and not in Newman's inventory.