Question

You are asked to travel to Milwaukee to observe and verify the inventory of the Milwaukee branch of one of your clients. You arrive on Thursday, December 30, and find that the inventory procedures have justbeen started. You spot a railway car on the sidetrack at the unloading door and ask the warehouse superintendent, Buck Rogers,how he plans to inventory the contents of the car. He responds, “We are not going to include the contents in the inventory.”

Later in the day, you ask the bookkeeper for the invoice on the carload and the related freight bill. The invoice lists the variousitems, prices, and extensions of the goods in the car. You note that the carload was shipped December 24 from Albuquerque,f.o.b. Albuquerque, and that the total invoice price of the goods in the car was \(35,300. The freight bill called for a payment of\)1,500. Terms were net 30 days. The bookkeeper affirms the fact that this invoice is to be held for recording in January.

Instructions

(a) Does your client have a liability that should be recorded at December 31? Discuss.

(b) Prepare a journal entry(ies), if required, to reflect any accounting adjustment required. Assume a perpetual inventory

system is used by your client.

(c) For what possible reason(s) might your client wish to postpone recording the transaction?

Short answer

The liability for the clients amounts to $36,800 that must be recorded against the inventory account. The inventory account is debited, and accounts payable is credited by $36,800 to record the adjustment. The possible reason for postponing the transaction may be due to the inventory system or postponing liability.

Step-by-step solution

Liability for the client

Yes, there I liability for the client. The client has received the invoice for $35,300 and the freight bill for $1500. So there is a liability for the client for $36,800 which must be paid within the next 30 days.

Journal entry

As the goods have been received based on f.o.b. destination, the title of the goods has been gained on Dec 30. Thus there would be a recording of the receiving of goods.

The journal entry would be as follow –

Date	Description	Debit	Credit
Dec 30	Inventory A/c	$36,800
	Accounts Payable		$36,800
	Being the goods has been received on f.o.b. destination

$$\begin{gathered} \mathit{V}\mathit{a}\mathit{l}\mathit{u}\mathit{e}\mathit{o}\mathit{f}\mathit{i}\mathit{n}\mathit{v}\mathit{e}\mathit{n}\mathit{t}\mathit{o}\mathit{r}\mathit{y}\mathbf{=}\mathit{I}\mathit{n}\mathit{v}\mathit{o}\mathit{i}\mathit{c}\mathit{e}\mathit{p}\mathit{r}\mathit{i}\mathit{c}\mathit{e}\mathbf{+}\mathit{F}\mathit{r}\mathit{e}\mathit{i}\mathit{g}\mathit{h}\mathit{t}\mathit{b}\mathit{i}\mathit{l}\mathit{l} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{35}\mathbf{,}\mathbf{300}\mathbf{+}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{500} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{36}\mathbf{,}\mathbf{800} \end{gathered}$$

Reasons for postponing transaction recording

One of the possible reasons to postpone the inventory recording may be the inventory system adopted. Under the perpetual system, the inventory is recorded immediately as soon as the title is transferred to the buyer. But under a periodic system, it is not necessary to record the transaction immediately. So under a periodic system company may postpone the transaction recording.

The other possible reason may be postponing the liability. Suppose the books of accounts have been closed, and the company does not want to reflect any more liability. In that case, it may postpone the recording of the transaction in the next accounting period to avoid any liability for the current year.