Question

Homestead Crafts, a distributor of handmade gifts, operates out of owner Emma Finn’s house. At the end of the current period, Emma looks over her inventory and finds that she has

1,600 units (products) in her basement, 26 of which were damaged by water and cannot be sold.

180 units in her van, ready to deliver per a customer order, terms FOB destination.

170 units out on consignment to a friend who owns a retail store.

How many units should Emma include in her company’s period-end inventory?

Answer 1

26 units that were damaged by water and are unsaleable will be written off as damaged inventory by debiting the Cost of goods sold account and crediting inventory account. So such damaged goods will not be included in the inventory.

In FOB destination terms, sales are recognized when goods are delivered to the buyer because in the FOB destination contract supplier retains the risk and is liable for any loss while the goods are in transit. Since the goods are still lying at supplier premises, the units will be recorded in the closing inventory of the supplier.

When goods are sent by the consignor on consignment, the goods are still under the ownership of the consignor until unless the goods are sold by the consignee. So 170 units out on consignment will be recorded in the inventory of Homestead Crafts,.

Total units of product available in the basement = 1600

Less: Goods damaged = 26

Add: Units in her VAN on terms FOB destination = 180

Add: Goods sent on consignment = 170

Units to be included in period-end inventory = 1924 units