Question

The December 31, 2018, inventory of Tog Company, based on a physical count, was determined to be $470,000. Included in that count was a shipment of goods received from a supplier at the end of the month that cost $70,000. The purchase was recorded and paid for in 2019. Another supplier shipment costing $30,000 was correctly recorded as a purchase in 2018. However, the merchandise, shipped FOB shipping point, was not received until 2019 and was incorrectly omitted from the physical count. A third purchase, shipped from a supplier FOB shipping point on December 28, 2018, did not arrive until January 3, 2019. The merchandise, which cost $100,000, was not included in the physical count and the purchase has not yet been recorded.

Answer 1

Answer:

Inventory = $70, 000 - no adjustment

inventory = $30, 000 - adjust inventory, increase value by  $30, 000

inventory = $100, 000 - no adjustment

Explanation:

Tog Company:

This question requires us to make adjusting journal entries to show the true value of the value of stock that we have on hand.  

FOB means “Free on Board”. This term means that the buyer accounts for the inventory in his books as soon as the inventory leaves the supplier’s shipping dock.

This term specifies at what point the obligations, costs and risks involved in the delivery of goods shifts from the seller to the buyer.

• Goods costing $70, 000:

This inventory was received before the end of the 2018 financial year. It was on hand when the physical count took place, and consequently was included in the stock count. The inclusion of the $70, 000 is correct. Since the shipment was received before the end of the month, it should have been recorded, and therefore, no adjustment is needed.  

• Goods costing $30, 000:

This inventory was correctly recorded as a purchase in 2018. FOB shipping point means that the obligations, and risks pass to Tog Company when the goods leave the shipping deck. This means that the inventory now belongs to Tog Company and should have been included in the physical count. When the goods arrive to the buyer, and there is a need to write down the inventory value, then such an adjustment will be made when necessary.

And Adjustment of $30, 000 (increase) to the value of inventory should be made.

• Goods costing $100, 000:

This inventory, although shipped before the end of the financial year, does not belong to the company. When hoods meet the asset definition, they are recognized as such and recorded as inventory in the accounts of the company. It was not recorded as a purchase possibly because the obligations, costs and risks have not passed to Tog Company. No adjustment should be made to s=change the value of the inventory.