Question

A company does not include in ending inventory any goods that have been shipped to consignees to be sold on consignment. The company has a policy of removing those goods from the inventory records at the time of shipment. Which of the following is an accurate statement regarding the company’s policy?

Multiple Choice

The policy is correct if management believes it is probable the inventory will be sold within the next year.

The policy is correct if the current selling price of inventory is above its original purchase cost.

The policy is not correct because the company has title to consignment goods until those goods are sold to a third-party customer.

The policy is not correct because inventory is recorded at fair value, and fair value is not known until those goods are sold.

Answer 1

Correct answer:

Option(3) is correct answer that the policy is not correct because the company has title of consignment goods until those goods are sold to a third-party customer.Even though the goods sold on consignment it's ownership title is lies with the company and it can be removed from the ending inventory of the company only when it is actually sold to the third party customer.

Incorrect answers:

Option (1) is incorrect answer that state the policy is correct if management believes it is probable the inventory will be sold within the next year,But the goods ownership title lies with the company and it can not be removed from the ending inventory.

Option (2) is incorrect answer that state the policy is correct if the current selling price of inventory is above its original purchase cost.It does not affect the title of the goods which lies with company till the actual goods get sold to third party customer.

Option (4) is incorrect answer that state the policy is not correct because inventory is recorded at fair value, and fair value is not known until those goods are sold.The goods removed from the ending inventory only when the goods actually sold to third party customer because title of the goods will also transfer to the third party customer.

So correct answer is option(3)