Question

In your audit of Donald Martin Company, you find that a physical inventory on December 31, 2020, showed merchandise with a cost of $399,450 was on hand at that date. You also discover the following items were all excluded from the $399,450.

1. Merchandise of $61,320 which is held by Martin on consignment. The consignor is the Max Suzuki Company
2. Merchandise costing $39,580 which was shipped by Martin f.o.b. destination to a customer on December 31, 2020. The customer was expected to receive the merchandise on January 6, 2021
3. Merchandise costing $42,890 which was shipped by Martin T.o.b. shipping point to a customer on December 29, 2020. The customer was scheduled to receive the merchandise on January 2, 2021.
4. Merchandise costing $75,730 shipped by a vendor fo.b, destination on December 30, 2020, and received by Martin on January 4, 2021.
5. Merchandise costing $52,310 shipped by a vender fo.b. shipping point on December 31, 2020, and received by Martin on January 5, 2021.

Based on the above information, calculate the amount that should appear on Martin's balance sheet at December 31, 2020, for inventory. Inventory as on December 31, 2020 $______

Answer 1

The correct inventory value for the balance sheet as of December 31, 2020, is $491,340, calculated by including merchandise shipped f.o.b. destination and f.o.b. shipping point that Martin had rights to and excluding consigned goods and items not yet under Martin's control.

Step-by-step explanation:

To calculate the correct inventory value for Donald Martin Company's balance sheet as of December 31, 2020, we need to review each item to determine if it should be included or excluded based on ownership at the time of inventory.

1. Merchandise on consignment should not be included in Martin's inventory since ownership has not transferred.
2. Merchandise shipped f.o.b. destination has not yet reached the customer and is still in transit, hence it should not be included until it reaches the customer.
3. Merchandise shipped f.o.b. shipping point should be included in Martin's inventory as ownership transfers to the customer when the goods are shipped.
4. Merchandise shipped by a vendor f.o.b. destination which Martin has not received by the year-end should not be included as ownership is not yet transferred.
5. Merchandise shipped by a vendor f.o.b. shipping point where ownership transfers when goods are shipped is included in Martin's inventory.

Considering these rules, item 1 ($61,320) and item 4 ($75,730) would not be included. Item 2 ($39,580) is included because it's still in transit with ownership remaining with Martin. Item 3 ($42,890) should not be included because ownership has transferred to the customer. Lastly, item 5 ($52,310) should be included in inventory as ownership transferred to Martin when it was shipped.

The adjusted inventory value would include the original inventory amount plus the items to be included, which would equate to: $399,450 + $39,580 (item 2) + $52,310 (item 5). Therefore, the final inventory value is $491,340.