Wprthmore Bank and Trust is considering giving Madsen Company a loan. Before doi

Question

Wprthmore Bank and Trust is considering giving Madsen Company a loan. Before doing so, it decides that further discussions with Madsen's accountant may be desirable. One area of particular concern is the Inventory accoumt. which has a year-end balance of $275,000. Discussions with the accountant reveal the following. 1. Madsen sold goods costing $55,000 to Allen Company FOB shipping point on December 28. The goods are not expected to reach Allen until January 12. The goods were not included in the physical inventory because they were not in the warehouse. 2. The physical count of the inventory did not include goods costing $95,000 that were shipped to Madsen FOB destination of December 27 and were still in transit at year-end. 3. Madsen received goods costing $25,000 on January 2. The goods were shipped FOB shipping point on December 26 by Lynch Co. The goods were not inclded in the physical count. 4. Madsen sold goods costing $51,000 to Finet of Canada FOB destination on December 30. The goods were received in Canada on January 8. They were not included in Madsen's physical inventory. 5. Madsen received goods costing $42,000 on January 2 that were shipped FOB destinatioin on December 29. The shipment was a rush order that was supposed to arrive December 31. This purchase was included in the ending inventory of $275,000. Determine the correct inventory amount on December 31, show all your work.

Explanation / Answer

Ending inventory - physical count $275,000 1. Madsen sold goods costing $55,000 to Allen Company FOB shipping point on December 28. The goods are not expected to reach Allen until January 12. The goods were not included in the physical inventory because they were not in the warehouse. $0 (Treatment is correct. When you sell FOB shipping, the goods are considered sold when the goods pass the ship's rails) 2. The physical count of the inventory did not include goods costing $95,000 that were shipped to Madsen FOB destination on December 27 and were still in transit at year-end. $0 (Treatment is correct. When you buy FOB destination, the goods aren't yours until they reach you) 3. Madsen received goods costing $25,000 on January 2. The goods were shipped FOB shipping point on December 26 by Lynch Co. The goods were not included in the physical count. +$25,000 (When you buy FOB shipping, the goods are yours when the goods pass over the ship's rails, on Dec 26) 4. Madsen sold goods costing $51,000 to Finet of Canada FOB destination on December 30. The goods were received in Canada on January 8. They were not included in Madsen's physical inventory. +$51,000 (When you sell FOB destination, the goods are not considered sold until they reach the destination, so on Dec 31, they should still belong to the seller) 5. Madsen received goods costing $42,000 on January 2 that were shipped FOB destination on December 29. The shipment was a rush order that was supposed to arrive December 31. This purchase was included in the ending inventory of $275,000. - $42,000 (Since the terms were FOB destination, the goods are yours only when received, and since they hadn't been received by Dec 31, they should not be included in inventory)

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