Question

Valuation of Inventory

The inventory on hand at the end of 2019 for Reddall Company is valued at a cost of $95,000. The following items were not included in this inventory:

1. Purchased goods in transit, under terms FOB shipping point, invoice price $4,200, freight costs $200.
2. Goods out on consignment to Marlman Company, sales price $5,600, shipping costs of $200.
3. Goods sold to Grina Co. under terms FOB destination, invoiced for $1,900 which included $178 freight charges to deliver the goods. Goods are in transit.
4. Goods held on consignment by Reddall at a sales price of $2,700 which included sales commission of 20% of sales price.
5. Purchased goods in transit, shipped FOB destination, invoice price $2,100 which included freight charges of $190.

Required:
Determine the cost of the ending inventory that Reddall should report on its December 31, 2019, balance sheet, assuming that its selling price is 140% of the cost of the inventory.

Answer 1

Valuation of Inventory with Goods in transit and consignment transactions:

At the end of the accounting period, the valuation of inventory is done with an intention to report it to financial statements. At such time, It may happen that there are some goods which are not in the physical custody of the business but will still form part of inventory (Goods in transit, goods on consignment, etc.) or are in its custody but still will not be included in inventory value ( Goods in transit FOB destination, Goods held as consignee).

Based on such scenarios, the following shall be the cost of inventory:

Explanation:

1. FOB Shipping point: In this case, purchased goods are sold with terms - FOB shipping point. Under this situation, goods in transit are under the ownership of the buyer once it is dispatched from the shipping point. Hence, the cost of goods (invoice price charged by supplier) and freight in (Cost of putting inventory in it's ready for sale position) are added to inventory.

2. Goods out on consignment: When goods are sent to the consignee and held by him/her, the same are still under the ownership of the consignor until those are sold. In this case, goods held by the consignee shall form part of inventory along with expense made to transfer such goods. Cost is calculated by dividing sale value with the percentage of selling price on cost.

3. Goods sold - FOB Destination: When goods are sold with FOB Destination, goods shall remain in property of seller till the time those are delivered to the buyer's place. In this case, as goods have not reached Grina, goods in transit shall become part of the inventory of the Reddall company. Freight shall not be added here as it will be charged to the income statement as freight out expense as part of selling and distribution expenses.

4. Goods held on consignment: These goods are property of the consignor and Reddall being consignee shall not record it.

5. Purchased goods - FOB Destination: These goods are not delivered and are in property of the seller, hence shall not be recorded in books of Reddall yet.