Question

P6-1A Pitt Limited is trying to determine the value of its ending inventory as of February 28, 2017, the company's year‐end. The accountant counted everything that was in the warehouse as of February 28, which resulted in an ending inventory valuation of $48,000. However, she didn't know how to treat the following transactions so she didn't record them.

(a) On February 26, Pitt shipped to a customer goods costing $800. The goods were shipped FOB shipping point, and the receiving report indicates that the customer received the goods on March 2.

(b) On February 26, Martine Inc. shipped goods to Pitt FOB destination. The invoice price was $350 plus $25 for freight. The receiving report indicates that the goods were received by Pitt on March 2.

(c) Pitt had $500 of inventory at a customer's warehouse “on approval.” The customer was going to let Pitt know whether it wanted the merchandise by the end of the week, March 4.

(d) Pitt also had $400 of inventory at a Belle craft shop, on consignment from Pitt.

(e) On February 26, Pitt ordered goods costing $750. The goods were shipped FOB shipping point on February 27. Pitt received the goods on March 1.

(f) On February 28, Pitt packaged goods and had them ready for shipping to a customer FOB destination. The invoice price was $350 plus $25 for freight; the cost of the items was $280. The receiving report indicates that the goods were received by the customer on March 2.

(g) Pitt had damaged goods set aside in the warehouse because they are no longer saleable. These goods originally cost $400 and, originally, Pitt expected to sell these items for $600.

Instructions

For each of the above transactions, specify whether the item in question should be included in ending inventory, and if so, at what amount. For each item that is not included in ending inventory, indicate who owns it and what account, if any, it should have been recorded in.

Determine cost of goods sold and ending inventory using FIFO, LIFO, and average‐cost with analysis.

Answer 1

a.

As the shipment was FOB shipping point, once the goods are shipped , the goods are the property of the customer. Therefore these are not to be included in the inventory.

b.

As the goods have been shipped by the supplier under FOB , destination, these shall not be included unless received by Pitt. These are the property of the supplier till the time they are received by Pit, i.e., March2.

c.

Since the goods have been sold ' On approval' unless the customer approves, these are the property of the company. Hence Pitt shall include these in the inventory.

d.

The goods sent on consignment lying with the agent,are the property of the consignor , Pitt in this case. Hence the same shall be included in the inventory.

e.

Since the goods have been shipped under FOB shippig point o February 27, these are to be included in the inventory of Pitt.

f.

These goods have to be included in the inventory, since the terms are FOB destination and the customer received them on March2. Since the accountant counted everything in the warehouse, this should have been already included in the $48,000 value.

g.

Since the goods are no longer saleable, these have to be removed from the inventory. This reduced the inventory by $400. (cost of the goods)

The final inventory value will be:

	Original value	48000
a	No effect	0
b	No effect	0
c	Add to inventory	500
d	Add to inventory	400
e	Add to inventory	750
f	No effect	0
g	Reduce from inventory	-400
	Ending inventory value	49250