Buffalo Company reported a December 31 ending inventory balance of $412,000. The

Question

Buffalo Company reported a December 31 ending inventory balance of $412,000. The following additional information is also available: . The ending inventory balance of $412.000 did not include goods costing $48,000 that were purchased by Buffalo on December 28 and shipped FOB destination on that date. Buffalo did not receive the goods until January 2 of the following year. The ending inventory balance of $412,000 included damaged goods at their original cost of $38,000. The net realizable value of the damaged goods was $10,000. . Based on this information, the correct balance for ending inventory on December 31 is:

Explanation / Answer

Solution: The correct balance for ending inventory on December 31 is : $384,000 Working Notes: Reported Ending Inventory balance $412,000 Purchased Goods in transit $0 Less: Cost of damaged goods included. ($38,000) Add: Net realizable value of damaged goods $10,000 correct balance for ending inventory $384,000 Notes: Goods purchased on FOB basis , will be included in inventory only when goods will be received, since, goods are not received till January 2, so cannot be included in December 31 inventory, Since, Risk & rewards towards the goods transferred to buyer under FOB , when received at buyers dock, So it is correctly not included in inventory. Goods should be included in inventory at COST or Net Realizable value which ever is less, since, the damaged goods which is included at cost , should be deducted and net realizable value should be added back to inventory. As Cost is $38,000 & NRV is $10,000 , NRV is lower , so included at NRV , Deduction of cost amount from inventory. Please feel free to ask if anything about above solution in comment section of the question.

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