Question

Assume that in an annual audit of Harlowe Inc. at December 31, 2017, you findthe following transactions near the closing date.

1. A special machine, fabricated to order for a customer, was finished and specifically segregated in the back part of the shippingroom on December 31, 2017. The customer was billed on that date and the machine excluded from inventory althoughit was shipped on January 4, 2018.

2. Merchandise costing \(2,800 was received on January 3, 2018, and the related purchase invoice recorded January 5. Theinvoice showed the shipment was made on December 29, 2017, f.o.b. destination.

3. A packing case containing a product costing \)3,400 was standing in the shipping room when the physical inventory wastaken. It was not included in the inventory because it was marked “Hold for shipping instructions.” Your investigationrevealed that the customer’s order was dated December 18, 2017, but that the case was shipped and the customer billedon January 10, 2018. The product was a stock item of your client.

4. Merchandise received on January 6, 2018, costing \(680 was entered in the purchase journal on January 7, 2018. The invoiceshowed shipment was made f.o.b. supplier’s warehouse on December 31, 2017. Because it was not on hand at December31, it was not included in inventory.

5. Merchandise costing \)720 was received on December 28, 2017, and the invoice was not recorded. You located it in thehands of the purchasing agent; it was marked “on consignment.”

Instructions

Assuming that each of the amounts is material, state whether the merchandise should be included in the client’s inventory, andgive your reason for your decision on each item.

Short answer

Only transactions 1, 3, and 4 would recognize the inventory on Dec 31, 2017.

Step-by-step solution

Step-by-step-solutionStep1: Transaction 1

In this case, it is not given whether the shipping was f.o.b. destination or f.o.b. shipping point. As the goods were shipped on 4 Jan 2018, it can be assumed to be f.o.b. shipping point. So the goods were in control of the company before Jan 4 and would be recognized as inventory on Dec 31, 2017.

Transaction 2

Under this case, the shipment was f.o.b. destination. So, the transaction would be recorded on the date of receiving the goods. Thus, inventories would not be recognized on Dec 31, 2017.

Transaction 3

Under this case, as the goods were shipped and billed on January 10, 2018, the title of goods was also transferred on the same date. So, on Dec 31, 2017, the goods would be recorded as inventory in the financial statement

Transaction 4A

Under this case, the shipment was based on the f.o.b. shipping point (supplier’s warehouse). So the title was received on the shipping date i.e. Dec 31, 2017. Thus the inventories should be recognized on Dec 31, 2017.

Transaction 5

As the good was received on a consignment basis, it would not be recognized as inventory. It will be recorded as consigned goods.