Question

Tri-State Bank and Trust is considering giving Novak Corp. a loan. Before doing so, management decides that further discussions with Novak’s accountant may be desirable. One area of particular concern is the inventory account, which has a year-end balance of $342,900. Discussions with the accountant reveal the following.

1. Novak sold goods costing $37,300 to Sorci Company, FOB shipping point, on December 28. The goods are not expected to arrive at Sorci until January 12. The goods were not included in the physical inventory because they were not in the warehouse.

2. The physical count of the inventory did not include goods costing $96,200 that were shipped to Novak FOB destination on December 27 and were still in transit at year-end.

3. Novak received goods costing $24,800 on January 2. The goods were shipped FOB shipping point on December 26 by Solita Co. The goods were not included in the physical count.

4. Novak sold goods costing $31,200 to Natali Co., FOB destination, on December 30. The goods were received at Natali on January 8. They were not included in Novak's physical inventory.

5. Novak received goods costing $47,000 on January 2 that were shipped FOB destination on December 29. The shipment was a rush order that was supposed to arrive December 31. This purchase was included in the ending inventory of $342,900.

Determine the correct inventory amount on December 31. Correct inventory $ enter the Correct inventory in dollars

Answer 1

1. When goods are shipped FOB shipping point, transportation costs are paid by the buyer and title or ownership passes when the carrier takes possession of goods. These goods are part of the buyer Inventory while in transit.

2. When goods are shipped FOB destination, transportation costs are paid by the seller and title or ownership does not pass until the carrier delivers the goods to the buyer. These goods are part of the seller Inventory while in transit.

3. FOB stands for Free on board.

Therefore, the correct inventory amount on December 31 :

Particulars	Amount ($)	Reason/Remarks
Closing balance as stated by accountant	342,900	Given in question
Point No 1	0	Correct. As novak sold goods FOB shipping point. Hence these are part of buyer (Sorci) Inventory. The title is transferred. This should not be added to Novak inventory.
Point No 2	0	Correct. Goods are shipped to Novak FOB destination. It means it is part of seller inventory until in transit. It should not be added to Novak Inventory.Buyer would not take ownership until goods are delivered.
Point No. 3	24,800	Incorrect. Goods were shipped FOB Shipping point. Goods should have been included as soon as they were shipped.So Add $ 24,800 to inventory.
Point No 4	31,200	Incorrect. Goods were sold to Natali on terms of FOB Destination. Seller retained ownership until goods were delivered. Goods received to Natali on January 8. Goods were in transit on Dec 31. Add $ 31,200 to inventory.
Point No 5	(47,000)	Incorrect. Goods were purchased on FOB destination. Buyer did not take ownership until goods were received. Goods were in transit on dec 31. hence goods are part of seller inventory. Substract $ 47,000 from inventory.
Correct Inventory Value	351,900

Correct inventory value on december 31 is $ 351,900