Kevin Farley, an auditor with Koews CPAs, is performing a review of Knight Compa

Question

Kevin Farley, an auditor with Koews CPAs, is performing a review of Knight Company’s Inventory account. Knight did not have a good year, and top management is under pressure to boost reported income. According to its records, the inventory balance at year-end was $741,180. However, the following information was not considered when determining that amount.

Prepare a schedule to determine the correct inventory amount.

Ending inventory-as reported $ 1. Included in the company’s count were goods with a cost of $236,910 that the company is holding on consignment. The goods belong to Mather Corporation. 2. The physical count did not include goods purchased by Knight with a cost of $35,570 that were shipped FOB shipping point on December 28 and did not arrive at Knight's warehouse until January 3. 3. Included in the Inventory account was $21,910 of office supplies that were stored in the warehouse and were to be used by the company’s supervisors and managers during the coming year. 4. The company received an order on December 29 that was boxed and was sitting on the loading dock awaiting pick-up on December 31. The shipper picked up the goods on January 1 and delivered them on January 6. The shipping terms were FOB shipping point. The goods had a selling price of $44,440 and a cost of $31,600. The goods were not included in the count because they were sitting on the dock. 5. On December 29, Knight shipped goods with a selling price of $77,330 and a cost of $62,380 to Houchins Sales Corporation FOB shipping point. The goods arrived on January 3. Houchins Sales had only ordered goods with a selling price of $10,120 and a cost of $6,930. However, a sales manager at Knight had authorized the shipment and said that if Houchins wanted to ship the goods back next week, it could. 6. Included in the count was $45,770 of goods that were parts for a machine that the company no longer made. Given the high-tech nature of Knight’s products, it was unlikely that these obsolete parts had any other use. However, management would prefer to keep them on the books at cost, “since that is what we paid for them, after all.”

Correct inventory $

Explanation / Answer

Inventory Balance $741180

Less: 1) 236910

3) 21910

6) 45770

Add: 2) 35570

4)31600

5) 55450 (62380-6930)

Total Cost of inventory: $559210

a) Consigned goods describe products that are in the physical custody of one party, but actually belong to another party. Thus, the party holding physical possession is not the legal owner.

So reduce the inventory by $236910

b) Goods sold F.O.B. shipping point become property of the purchaser once shipped by the seller. So goods are shipped on 28th December so it will added back to Knight inventory

c) Cost of supplies is the cost to the company not inventory. So we need to deduct it from cost of inventory

d) Goods sold F.O.B. shipping point become property of the purchaser once shipped by the seller. The goods are shipped on 1st January so it will be included in Knight inventory as on 31st Decemeber as it is shipped the next day,so it will added back to Knight inventory

e) As it is sent on sale or return basis. The status is unkown at year end. So we assume year end is unapproved. So, (62380-6930) will be added back the inventory

f) Inventory is calculated on cost or market value whichevr is low. Soif its obselete it does not have net realizable value so it should be deducted.

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