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Fancy Company is a wholesaler distributor of automotive replacement parts. Initial amounts taken from accounting records...

Fancy Company is a wholesaler distributor of automotive replacement parts. Initial amounts taken from accounting records on December 31, 2016 are as follows: Inventory on December 31, based on physical count, P1,250,000; accounts payable, P1,000,000; sales, P9,000,000.Parts held on consignment from another company to Fancy, the consignee, amounting to P165,000 were included in the physical count on December 31, 2016, and in accounts payable on December 31, 2016.P20,000 of parts which were purchased and paid for in December 2016, were sold in the last week of 22016 and appropriately recorded as sales of P28,000. The parts were included in the physical count on December 31, 2016 because the parts were on the loading dock waiting to be picked up by the customers Parts in transit on December 31, 2016 to customers shipped FOB shipping point on December 28 2016 amounted to P34,000. The customer received the parts on January 6, 2017. Sales of P40,000 to customers for the parts were recorded by Fancy on January 2, 2017Retailers were holding P210,000 at cost and P250,000 at retail of goods on consignment from Fancy Company on December 31, 2016Goods were in transit from a vendor to Fancy Company on December 31, 2016. The cost of goods was P25,000. The goods were shipped FOB shipping point on December 31, 2016.What is the correct amount of inventory?

Solutions

Expert Solution

Step 1

Physical count of inventory means businesses physically count the inventory stock. While valuation of this inventory, following point need to be noted

  • Goods received on consignment are never owned by the company. They are just sold on behalf of another company. Thus they shouldn't be included in inventory
  • Similarly, Goods sent on consignment are still owned by the company. Thus they should be included in the inventory (at cost not retail price)
  • For parts sold on FOB shipping point, ownership is transferred as soon at goods are in transit irrespective of whether received by customer or not. Thus they shouldn't be included in inventory (at cost)
  • Also for goods to be received by vendor on FOB shipping point, ownership transfers as soon as they are in transit. Thus should be included in inventory.

Step 2

Thus, correct value of inventory will be computed as follows

Note : Parts in transit on December 31, 2016 to customers shipped FOB shipping point on December 28 2016 amounting to P34,000 will not be added back to the cost of inventory as they are considered to be sold already as soon as they were in transit.

Step 3

Answer : P1,300,000

ekkarill92 answered 1 year ago
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