Question

Sherman, Inc. counted its ending inventory as $178,000 at year-end, January 31, 2016.

Upon review of the records, it was noted that the following items were in transit during the count:

A) $2,000 of goods shipped by a supplier to Sherman sent FOB destination on January 31 were received February 5, and were not counted by Sherman.

B) $5,000 of goods shipped by a supplier to Sherman sent FOB shipping point on January 30 were received February 2, and were not counted by Sherman.

C) $6,000 of goods shipped by Sherman to a customer FOB shipping point on January 31 were received by the customer February 3, and were counted by Sherman.

Determine the correct inventory balance at January 31.

a. $177,000
b. $178,000
c. $174,000
d. $172,000

Answer 1

The corrected inventory balance for Sherman, Inc. at year-end January 31, 2016, should be $177,000. This includes adding $5,000 worth of goods shipped FOB shipping point and subtracting $6,000 worth of goods shipped to a customer FOB shipping point that were incorrectly included.

Step-by-step explanation:

To determine the correct inventory balance for Sherman, Inc., we need to consider which items should be included in inventory at year-end based on the shipping terms (FOB destination and FOB shipping point).

• FOB destination: The goods in transit worth $2,000 shipped FOB destination on January 31 and received on February 5 should not be included in Sherman's ending inventory because the title transfers upon delivery, which is after the count date.
• FOB shipping point: The goods worth $5,000 shipped FOB shipping point on January 30 and received on February 2 should be included in Sherman's ending inventory because the title transfers at the shipping point, which is before the count date.
• The goods worth $6,000 shipped out to a customer FOB shipping point on January 31 and received by the customer on February 3 were counted by Sherman but should not have been included since the title transferred to the customer on the shipping date.

Therefore, to correct the inventory balance, we need to add the $5,000 of goods that were in transit under FOB shipping point terms and subtract the $6,000 that were erroneously included in the count:

$178,000 (initial count) + $5,000 (add for FOB shipping point) - $6,000 (subtract for counted goods shipped out) = $177,000 (corrected inventory balance).