Question

Problem #1 Facts: (Question 1 - Question 5)

On December 31, 2019, of the current year Smith Enterprises physically counted $1,500,000 of inventory. The following additional information is also available:

1. Smith Enterprises sold goods for $250,000 to Julia Corp. Smith Enterprises had originally purchased the goods for $175,000. The order was shipped to Julia FOB shipping point on December 28, 2019 and arrived at Julia's facility on January 2, 2020.

2. Smith purchased goods costing $40,000 from vendor Lemon Drop Company. Lemon Drop shipped the goods to Smith FOB shipping point on December 29, 2019 and the order was delivered on January 1, 2020 The shipment was a rush order that was supposed to arrive by December 31.

3. Smith sold goods for $250,000 to Nash Company. Smith had originally purchased the goods for $175,000. The order was shipped to Nash, FOB Destination on December 28, 2019 and arrived at Nash's facility on January 4, 2020.

4. Smith purchased goods costing $30,000 from vendor Razzles Company. Razzles shipped the goods to Smith FOB destination on December 30, 2019 and the order was delivered on January 3, 2020.

Question 1: For letter A, does Smith adjust or not adjust the physical count for the in-transit goods? Explain.

Question 2: For letter B, does Smith adjust or not adjust the physical count for the in-transit goods? Explain.

Question 3: For letter C, does Smith adjust or not adjust the physical count for the in-transit goods? Explain.

Question 4: For letter D, does Smith adjust or not adjust the physical count for the in-transit goods? Explain.

Question 5a: Consider the in-transit items described above and further assume that Smith’s general ledger reports a Merchandise Inventory balance at 12/31/2019 of $1,750,000. What adjusting entry should Smith prepare at 12/31/2019 to record this inventory shrink? (Make sure to provide the calculations for the number you use in your journal entry!)

Date: MM/DD/YY

Dr. Account………...XX

            Cr. Account…………...XX

Question 5b: Consider your entry in 5a, what could have caused this shrink?

Answer 1

	Need to be adjusted	Reason
For A	No	In case of FOB shipping, risk of the goods transfers to buyer as soon as goods are put of transport vehicle. Here as ther goods were shipped on Dec, 28, irrespective of when the buyer receives the goods, title in goods transferred to buyer on Dec, 28 only, so not to be included in invenotry.
For B	Yes	FOB shipping Purchases. In case of FOB shipping, risk of the goods transfers to buyer as soon as goods are put of transport vehicle. Here as ther goods were shipped on Dec, 29 same should be included in in trransit inventory. Cost $ 40000
For C	Yes	Here, the goods are sold FOB destination. Title in such goods is transferred to buyer once the goods reach the mentioned destination. As the goods are received by buyer only after 31, dec so this will be included in inventory as on 31, Dec at cost $ 175000.
For D	No	FoB destination purchases. To be included in inventory only after these are received. Received on Jan, 3 so not to be included in inventory of 31/ dec

Q5a		Physically counted Inventories	1500000
	Add	For B	40000
	Add	For C	175000
		Total Inventory Physical count (A)	1715000
		Merchandise Inventory balance (B)	1750000
		Inventory shrink (A-B)	35000
		If considered normal loss
		Dr Cost of Goods sold	35000
		Cr Merchandise Inventory		35000
		(to book normal shrink)
		If considered abnormal loss
		Dr Shrinkage Exps	35000
		Cr Merchandise Inventory		35000
		( to book abnormal shrinkage)

Q5 b

It can be due to Theft, clerical error, vendor fraud or some unknow reason. It could be noraml loss which happens due to nature of goods like fuel, parafen etc.