Umatilla Bank and Trust is considering giving Pohl Company a loan. Before doing so, it decides that further discussions with Pohl’s accountant may be desirable. One area of particular concern is the Inventory account, which has a year-end balance of $275,000. Discussions with the accountant reveal the following.

1. Pohl Company sold goods costing $55,000 to Hemlock Company FOB shipping point on December 28. The goods are not expected to reach Hemlock 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 Pohl Company FOB destination on December 27 and were still in transit at year-end.
3. Pohl Company received goods costing $25,000 on January 2. The goods were shipped FOB shipping point on December 26 by Yanice Co. The goods were not included in the physical count.
4. Pohl Company sold goods costing $51,000 to Ehler of Canada FOB destination on December 30. The goods were received in Canada on January 8. They were not included in Pohl Company physical inventory.
5. Pohl Company 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.

Required:
Determine the correct inventory amount on December 31.

Answer: $309,000

Explanation:

First it is important to note the difference between the Shipping terms.

FOB (Free on Board) Shipping Point means that the goods being sold belong to the owner as soon as the seller leaves it at shipping point. Shipping point being as soon as the Carrier delivering it has picked it up from the seller. At this point it should no longer be included in the Seller's books but in the buyer's.

FOB Destination means that the goods only become that of the buyer when the buyer receives it. Until then, the goods are under the ownership of the Seller and need to be recorded in the books as such until the buyer receives it.

Reconciling the balance therefore,

Year end Balance is $275,000

1. Sales to Hemlock $55,000 not included in final balance is fine because it is FOB shipping point and as so it is not to be included in inventory.

2. Sales to Pohl FOB Destination of $95,000 not included in inventory count is fine because it should only be included when it is received as it was shipped FOB Destination.

3. Pohl company should have INCLUDED this $25,000 because it was shipped FOB Shipping point meaning that Pohl gets ownership as soon as Yanice Co sent it on December 26 which is within the period.

4. Pohl should INCLUDE the $51,000 because it shipped the goods FOB Destination meaning that it only relinquishes Ownership when Ehler of Canada receives it which was in the next period.

5. Pohl SHOULD NOT HAVE INCLUDED the $42,000 balance in the inventory amount because it was shipped FOB Destination which means that they only get Ownership when they receive it. They received it in the next period and as such should not include it in there period in question.

Calculating the inventory amount then gives,

= 275,000 + 25,000 + 51,000 - 42,000

= $309,000

The correct inventory amount on December 31 is $309,000

The correct inventory amount on December 31 is = $309,000

Preferably, it is important to note the distinction between the Shipping terms.

FOB (Free on Board) Shipping Point suggests that the goods being sold belong to the proprietor as soon as the seller vamooses them at the shipping point. The shipping point is as soon as the Carrier delivering it has picked it up from the seller. At this moment, it should no longer be included in the Seller's books but in the buyer's.

FOB Terminus indicates that the goods only become that of the buyer when the buyer receives them. Until then, the goods are under the ownership of the Seller and also they need to be recorded in the books as such until the buyer receives them.

Negotiating the balance, therefore,

The year-end Balance is $275,000

1. Sales to Hemlock $55,000 not included in last balance is fine because it is FOB shipping point and as so it is not to be contained in inventory.

2. Sales to Pohl FOB Destination of $95,000 not retained in inventory count is fine because it should only be included when it is received as it was shipped to FOB Destination.

3. Pohl company should have INCLUDED this $25,000 because it was shipped FOB Shipping point definition that Pohl gets ownership as shortly as Janice Co sent it on December 26 which is within the time.

4. Pohl should INCLUDE the $51,000 because it shipped the goods FOB Destination suggesting that it only relinquishes Right when Ehler of Canada receives it which was in the next period.

5. Pohl SHOULD NOT HAVE INCLUDED the $42,000 reward in the stock amount because it was shipped FOB Terminus which suggests that they only get Ownership when they accept it. They received it in the next period and as such should not enclose it in their period in question.

Now the Calculating of the inventory amount then gives,

= 275,000 + 25,000 + 51,000 - 42,000

= $309,000

Therefore, The correct inventory amount on December 31 is $309,000

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