Inventory Valuation

Q#1
In your audit of Jose Oliva Company, you find that a physical inventory on December 31, 2017,
showed merchandise with a cost of $441,000 was on hand at that date. You also discover the
following items were all excluded from the $441,000.
1. Merchandise of $61,000 which is held by Oliva on consignment. The consignor is the Max
Suzuki Company.
2. Merchandise costing $38,000 which was shipped by Oliva f.o.b. destination to a customer on
December 31, 2017. The customer was expected to receive the merchandise on January 6,
2018.
3. Merchandise costing $46,000 which was shipped by Oliva f.o.b. shipping point to a customer
on December 29, 2017. The customer was scheduled to receive the merchandise on January
2, 2018.
4. Merchandise costing $83,000 shipped by a vendor f.o.b. destination on December 30, 2017,
and received by Oliva on January 4, 2018.
5. Merchandise costing $51,000 shipped by a vendor f.o.b. shipping point on December 31,
2017, and received by Oliva on January 5, 2018.

Based on the above information, calculate the amount that should appear on Oliva’s balance
sheet at December 31, 2017, for inventory.

Q#2
Assume that in an annual audit of Harlowe Inc. at December 31, 2017, you find the 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 shipping room on December 31, 2017. The customer was
billed on that date and the machine excluded from inventory although it 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. The invoice 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 was taken. It was not included in the inventory because it was marked
“Hold for shipping instructions.” Your investigation revealed that the customer’s order was
dated December 18, 2017, but that the case was shipped and the customer billed on 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 invoice showed shipment was made f.o.b. supplier’s warehouse on
December 31, 2017. Because it was not on hand at December 31, 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 the hands of the purchasing agent; it was marked “on
consignment.”

Assuming that each of the amounts is material, state whether the merchandise should be included
in the client’s inventory, and give your reason for your decision on each item.
Q#3
Colin Davis Machine Company maintains a general ledger account for each class of inventory,
debiting such accounts for increases during the period and crediting them for decreases. The
transactions below relate to the Raw Materials inventory account, which is debited for materials
purchased and credited for materials requisitioned for use.
1. An invoice for $8,100, terms f.o.b. destination, was received and entered January 2, 2017.
The receiving report shows that the materials were received December 28, 2016.
2. Materials costing $28,000, shipped f.o.b. destination, were not entered by December 31,
2016, “because they were in a railroad car on the company’s siding on that date and had not
been unloaded.”
3. Materials costing $7,300 were returned to the supplier on December 29, 2016, and were
shipped f.o.b. shipping point. The return was entered on that date, even though the materials
are not expected to reach the supplier’s place of business until January 6, 2017.
4. An invoice for $7,500, terms f.o.b. shipping point, was received and entered December 30,
2016. The receiving report shows that the materials were received January 4, 2017, and the
bill of lading shows that they were shipped January 2, 2017.
5. Materials costing $19,800 were received December 30, 2016, but no entry was made for
them because “they were ordered with a specified delivery of no earlier than January 10,
2017.”

Prepare correcting general journal entries required at December 31, 2016, assuming that the
books have not been closed.

Q#4
Craig Company asks you to review its December 31, 2017, inventory values and prepare the
necessary adjustments to the books. The following information is given to you.
1. Craig uses the periodic method of recording inventory. A physical count reveals $234,890 of
inventory on hand at December 31, 2017.
2. Not included in the physical count of inventory is $13,420 of merchandise purchased on
December 15 from Browser. This merchandise was shipped f.o.b. shipping point on
December 29 and arrived in January. The invoice arrived and was recorded on December 31.
3. Included in inventory is merchandise sold to Champy on December 30, f.o.b. destination.
This merchandise was shipped after it was counted. The invoice was prepared and recorded
as a sale on account for $12,800 on December 31. The merchandise cost $7,350, and
Champy received it on January 3.
4. Included in inventory was merchandise received from Dudley on December 31 with an
invoice price of $15,630. The merchandise was shipped f.o.b. destination. The invoice, which
has not yet arrived, has not been recorded.
5. Not included in inventory is $8,540 of merchandise purchased from Glowser Industries. This
merchandise was received on December 31 after the inventory had been counted. The invoice
was received and recorded on December 30.
6. Included in inventory was $10,438 of inventory held by Craig on consignment from Jackel
Industries.
7. Included in inventory is merchandise sold to Kemp f.o.b. shipping point. This merchandise
was shipped on December 31 after it was counted. The invoice was prepared and recorded as
 a sale for $18,900 on December 31. The cost of this merchandise was $10,520, and Kemp
received the merchandise on January 5.
8. Excluded from inventory was a carton labeled “Please accept for credit.” This carton contains
merchandise costing $1,500 which had been sold to a customer for $2,600. No entry had
been made to the books to reflect the return, but none of the returned merchandise seemed
damaged; Craig will honor the return.

(a) Determine the proper inventory balance for Craig Company at December 31, 2017.
(b) Prepare any correcting entries to adjust inventory to its proper amount at December 31, 2017.
Assume the books have not been closed.

Q#5
Ann M. Martin Company makes the following errors during the current year. (Evaluate each case
independently and assume ending inventory in the following year is correctly stated.)
1. Ending inventory is overstated, but purchases and related accounts payable are recorded
correctly.
2. Both ending inventory and purchases and related accounts payable are understated. (Assume
this purchase was recorded and paid for in the following year.)
3. Ending inventory is correct, but a purchase on account was not recorded. (Assume this
purchase was recorded and paid for in the following year.)

Indicate the effect of each of these errors on working capital, current ratio (assume that the
current ratio is greater than 1), retained earnings, and net income for the current year and the
subsequent year.

Q#6
At December 31, 2016, Stacy McGill Corporation reported current assets of $370,000 and
current liabilities of $200,000. The following items may have been recorded incorrectly.
1. Goods purchased costing $22,000 were shipped f.o.b. shipping point by a supplier on
December 28. McGill received and recorded the invoice on December 29, 2016, but the
goods were not included in McGill’s physical count of inventory because they were not
received until January 4, 2017.
2. Goods purchased costing $15,000 were shipped f.o.b. destination by a supplier on December
26. McGill received and recorded the invoice on December 31, but the goods were not
included in McGill’s 2016 physical count of inventory because they were not received until
January 2, 2017.
3. Goods held on consignment from Claudia Kishi Company were included in McGill’s
December 31, 2016, physical count of inventory at $13,000.
4. Freight-in of $3,000 was debited to advertising expense on December 28, 2016.

(a) Compute the current ratio based on McGill’s balance sheet.

(b) Recompute the current ratio after corrections are made.
(c) By what amount will income (before taxes) be adjusted up or down as a result of the
corrections?
Q#7
The net income per books of Linda Patrick Company was determined without knowledge of the
errors indicated.
Year Net Income per Books Error in Ending Inventory
2012 $50,000 Overstated $ 3,000
2013 52,000 Overstated 9,000
2014 54,000 Understated 11,000
2015 56,000 No error
2016 58,000 Understated 2,000
2017 60,000 Overstated 8,000

Prepare a worksheet to show the adjusted net income figure for each of the 6 years after taking
into account the inventory errors.

Q#8
Dimitri Company, a manufacturer of small tools, provided the following information from its
accounting records for the year ended December 31, 2017.
Inventory at December 31, 2017 (based on physical count of goods-
in Dimitri’s plant, at cost, on December 31, 2017) $1,520,000
Accounts payable at December 31, 2017 1,200,000
Net sales (sales less sales returns) 8,150,000
Additional information is as follows.
1. Included in the physical count were tools billed to a customer f.o.b. shipping point on
December 31, 2017. These tools had a cost of $31,000 and were billed at $40,000. The
shipment was on Dimitri’s loading dock waiting to be picked up by the common carrier.
2. Goods were in transit from a vendor to Dimitri on December 31, 2017. The invoice cost was
$76,000, and the goods were shipped f.o.b. shipping point on December 29, 2017.
3. Work in process inventory costing $30,000 was sent to an outside processor for plating on
December 30, 2017.
4. Tools returned by customers and held pending inspection in the returned goods area on
December 31, 2017, were not included in the physical count. On January 8, 2018, the tools
costing $32,000 were inspected and returned to inventory. Credit memos totaling $47,000
were issued to the customers on the same date.
5. Tools shipped to a customer f.o.b. destination on December 26, 2017, were in transit at
December 31, 2017, and had a cost of $26,000. Upon notification of receipt by the customer
on January 2, 2018, Dimitri issued a sales invoice for $42,000.
6. Goods, with an invoice cost of $27,000, received from a vendor at 5:00 p.m. on December
31, 2017, were recorded on a receiving report dated January 2, 2018. The goods were not
included in the physical count, but the invoice was included in accounts payable at December
31, 2017.
7. Goods received from a vendor on December 26, 2017, were included in the physical count.
However, the related $56,000 vendor invoice was not included in accounts payable at
December 31, 2017, because the accounts payable copy of the receiving report was lost.
8. On January 3, 2018, a monthly freight bill in the amount of $8,000 was received. The bill
specifically related to merchandise purchased in December 2017, one-half of which was still
 in the inventory at December 31, 2017. The freight charges were not included in either the
inventory or in accounts payable at December 31, 2017.

Using the format shown below, prepare a schedule of adjustments as of December 31, 2017, to
the initial amounts per Dimitri’s accounting records. Show separately the effect, if any, of each
of the eight transactions on the December 31, 2017, amounts. If the transactions would have no
effect on the initial amount shown, enter NONE.
Inventory Accounts Payable Net Sales
Initial amounts $1,520,000 $1,200,000 $8,150,000
Adjustments:
Increase/(Decrease)
1
2
3
4
5
6
7
8
Adjusted amounts

Q#9
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 just been 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 various items, 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.

(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?
Q#10
George Solti, the controller for Garrison Lumber Company, has recently hired you as assistant
controller. He wishes to determine your expertise in the area of inventory accounting and
therefore asks you to answer the following unrelated questions.
1. A company is involved in the wholesaling and retailing of automobile tires for foreign cars.
Most of the inventory is imported, and it is valued on the company’s records at the actual
inventory cost plus freight-in. At year-end, the warehousing costs are prorated over cost of
goods sold and ending inventory. Are warehousing costs considered a product cost or a
period cost?
2. A certain portion of a company’s “inventory” is composed of obsolete items. Should obsolete
items that are not currently consumed in the production of “goods or services to be available
for sale” be classified as part of inventory?
3. A company purchases airplanes for sale to others. However, until they are sold, the company
charters and services the planes. What is the proper way to report these airplanes in the
company’s financial statements?
4. A company wants to buy coal deposits but does not want the financing for the purchase to be
reported on its financial statements. The company therefore establishes a trust to acquire the
coal deposits. The company agrees to buy the coal over a certain period of time at specified
prices. The trust is able to finance the coal purchase and pay off the loan as it is paid by the
company for the minerals. How should this transaction be reported?