Question

Delar Co. completed its year-end physical count of inventory. The inventory was valued at first-in, first-out (FIFO) costs and totaled $500,000. Delar subsequently noted the following two items: 1,000 units of inventory with a FIFO cost of $10 each were shipped and billed to a customer, f.o.b. destination. These items were included in the physical count. 6,000 units at a FIFO cost of $5 each were held on consignment for one of its suppliers, but were excluded from the physical count. What amount should Delar report as inventory at year end?
A. $530,000
B. $520,000
C. $500,000
D. $490,000

Answer 1

Answer:

D. $490,000

Explanation:

The inventory was valued at first-in, first-out (FIFO) costs and totaled $500,000.

Adjustments:                                                              

The goods worth $10,000 (1,000 units x $10 cost) were shipped and billed to a customer meaning that company has already recorded the sales in its income statement therefore they became the property of the customer and should not have been included in the inventory count. The $10,000 should be removed from the inventory recorded bringing the inventory balance at $490,000 ($500,000 - $10,000).

The goods worth $30,000 (6,000 units x $5 cost) will not be included in the total inventory count because the inventory is held on consignment for one of the company's supplier and the ownership of the goods belongs to the consignor (in this case, the supplier) until they are sold. The goods appear in the inventory records of the consignor (in this case, supplier) not the consignee (in this case, the company). In this case, the company has not included the goods in its inventory cost therefore no adjustment is necessary.