Question

Exercise 6-1

Umatilla Bank and Trust is considering giving Blossom Company a loan. Before doing so, it decides that further discussions with Blossom Company’s accountant may be desirable. One area of particular concern is the Inventory account, which has a year-end balance of $250,820. Discussions with the accountant reveal the following. 1. Blossom Company sold goods costing $54,230 to Hemlock Company FOB shipping point on December 28. The goods are not expected to reach Hemlock until January 12. The goods were not included in the physical inventory because they were not in the warehouse. 2. The physical count of the inventory did not include goods costing $91,590 that were shipped to Blossom Company FOB destination on December 27 and were still in transit at year-end. 3. Blossom Company received goods costing $24,420 on January 2. The goods were shipped FOB shipping point on December 26 by Yanice Co. The goods were not included in the physical count. 4. Blossom Company sold goods costing $56,030 to Ehler of Canada FOB destination on December 30. The goods were received in Canada on January 8. They were not included in Blossom Company physical inventory. 5. Blossom Company received goods costing $39,190 on January 2 that were shipped FOB destination on December 29. The shipment was a rush order that was supposed to arrive December 31. This purchase was included in the ending inventory of $250,820. Determine the correct inventory amount on December 31. The correct inventory amount on December 31 $Enter a dollar amount

Answer 1

Before giving solution, we need to understand two terms- FOB Shipping Point and FOB Destination.
FOB Shippint Point:	Means Free on Board to Sellers Location.
	Means Seller will recognize Sale immediately it leaves his location and in turn will reduce inventory.
	Means Buyer will recognize purcase immediately it leaves Seller Location and in turn will increase inventory.
FOB Destination:	Means Free on Board to Buyer's Location.
	Means Seller will recognize Sale once it reaches buyer location and in turn will reduce inventory.
	Means Buyer will recognize purcase once it reaches to buyer location and in turn will increase inventory.
Now the solution, point wise based on above definitions:
1. Blossom Company sold goods costing $54,230 to Hemlock Company FOB shipping point on December 28. The goods are not expected to reach Hemlock until January 12. The goods were not included in the physical inventory because they were not in the warehouse.
Since goods are sold FOB shipping point, Blossom will reduce inventory immediately it leaves his location.
And hence, this should not be included in inventory.
Impact given in question is correct and no correction to be done.
2. The physical count of the inventory did not include goods costing $91,590 that were shipped to Blossom Company FOB destination on December 27 and were still in transit at year-end.
Since Goods are sent FOB destination, Blossom will not increase inventory untill it reaches to him
And hence, impact given in question is correct and no correction to be done.
3. Blossom Company received goods costing $24,420 on January 2. The goods were shipped FOB shipping point on December 26 by Yanice Co. The goods were not included in the physical count.
Since goods are sold FOB Shipping Point, This should be included in inventory even if in transit on 31st December
Impact: Inventory to be increased by $24,420.
4. Blossom Company sold goods costing $56,030 to Ehler of Canada FOB destination on December 30. The goods were received in Canada on January 8. They were not included in Blossom Company physical inventory.
Since goods Sold FOB Destination, Should be reduced from inventory only once it reaches to Buyer.
However, goods are still on transit on 31st December, this should be included in Blossom Inventory
Impact: inventory to be increased by $56,030
5. Blossom Company received goods costing $39,190 on January 2 that were shipped FOB destination on December 29. The shipment was a rush order that was supposed to arrive December 31. This purchase was included in the ending inventory of $250,820.
Blossom will increase inventory only when goods received by him as this is FOB destination. However since it was
in transit on 31st December, this should not be considered in inventory.
Impact: Inventory to be reduced by $ 39,190.
Ending Inventory Given		$250,820
Point No 1	$0
Point No 2	$0
Point No 3	$24,420
Point No 4	$56,030
Point No 5	-$39,190	$41,260
Correct Inventory		$292,080