Question

The following inventory transactions took place near December 31, 2018, the end of the Rasul Company's fiscal year-end:

1. On December 27, 2018, merchandise costing $2,000 was shipped to the Myers Company on consignment. The shipment arrived at Myers's location on December 29, but none of the merchandise was sold by the end of the year. The merchandise was not included in the 2018 ending inventory.
   
2. On January 5, 2019, merchandise costing $8,000 was received from a supplier and recorded as a purchase on that date and not included in the 2018 ending inventory. The invoice revealed that the shipment was made f.o.b. shipping point on December 28, 2018.
   
3. On December 29, 2018, the company shipped merchandise costing $12,000 to a customer f.o.b. destination. The goods, which arrived at the customer's location on January 4, 2019, were not included in Rasul's 2018 ending inventory. The sale was recorded in 2018.
   
4. Merchandise costing $4,000 was received on December 28, 2018, on consignment from the Aborn Company. Purchase was not recorded and the merchandise was not included in the 2018 ending inventory.
   
5. Merchandise costing $6,000 was received and recorded as a purchase on January 8, 2019. The invoice revealed that the merchandise was shipped from the supplier on December 28, 2018, f.o.b. destination. The merchandise was not included in the 2018 ending inventory.

Assignment:

1. State whether Rasul correctly accounted for each of the above transactions. Give the reason for your answer.
   
2. P 8–2 Items to be included in the inventory.

Answer 1

1. On December 27, 2018, merchandise costing $2,000 was shipped to the Myers Company on consignment. The shipment arrived at Myers's location on December 29, but none of the merchandise was sold by the end of the year. The merchandise was not included in the 2018 ending inventory.

Solution :

Goods send on the consignment basis is the inventory of the consignor, not the inventory of the consignee. Thus , the unsold inventory at the year end is the inventory of the consignor.

Rasul is not correct while doing the accounting. The goods costing $2,000 are send to the Myers Company on consignment basis , and are not sold at year end. So , the inventory of the Rasul at 31^st December should include the same. Rasul should increase the ending inventory by $2000.

2. On January 5, 2019, merchandise costing $8,000 was received from a supplier and recorded as a purchase on that date and not included in the 2018 ending inventory. The invoice revealed that the shipment was made f.o.b. shipping point on December 28, 2018.

Solution ; As per AS-5- Revenue recognition , Revenue should be recognized when the ownership and the risk and rewards associated with the goods are transferred to the buyer. In the case of the FOB shipment , the risk and reward is transferred as soon as the shipment cross the custom frontier of the country. In the present case, the goods are shipped on FOB basis on 28-December-2018 and the actual goods received on 05-january-2019. Rasul is incorrect. He should recognize the purchase in 2018 and should include the stock of $8000 in year ending inventory.

3. On December 29, 2018, the company shipped merchandise costing $12,000 to a customer f.o.b. destination. The goods, which arrived at the customer's location on January 4, 2019, were not included in Rasul's 2018 ending inventory. The sale was recorded in 2018.

Solution ; As per AS-5- Revenue recognition , Revenue should be recognized when the ownership and the risk and rewards associated with the goods are transferred to the buyer. In the case of the FOB shipment , the risk and reward is transferred as soon as the shipment cross the custom frontier of the country. In the present case, the goods are shipped on FOB basis on 29-December-2018 and the actual goods received by the buyer on 04-january-2019. Rasul is correct in accounting of this revenue. He had recognize the revenue of $12,000 in 2018 and the stock should not be included in the year end inventory.

4. Merchandise costing $4,000 was received on December 28, 2018, on consignment from the Aborn Company. Purchase was not recorded and the merchandise was not included in the 2018 ending inventory.

Solution : The goods are received on consignment basis. These goods are belonged to the consignor not the consignee. In this case, rasul is correct , as the goods are received on consignment basis , hence it is not his inventory and should not be included in the year ending inventory of 2018

5. Merchandise costing $6,000 was received and recorded as a purchase on January 8, 2019. The invoice revealed that the merchandise was shipped from the supplier on December 28, 2018, f.o.b. destination. The merchandise was not included in the 2018 ending inventory.

Solution ; As per AS-5- Revenue recognition , Revenue should be recognized when the ownership and the risk and rewards associated with the goods are transferred to the buyer. In the case of the FOB shipment , the risk and reward is transferred as soon as the shipment cross the custom frontier of the country. In the present case, the goods are shipped on FOB basis on 28-December-2018 and the actual goods received on 08-january-2019. Rasul is incorrect. He should recognize the purchase in 2018 and should include the stock of $6000 in year ending inventory.