A company’s year-end inventory on December 31 was $343,000 (at cost) based on a physical count, before any necessary adjustment for the following:

Inventory costing $48,000, shipped f.o.b. shipping point from a vendor on December 30, was received at the company’s location on January 5 of the following year.
Inventory costing $40,000, shipped f.o.b. destination from a vendor on December 28, was received at the company’s location on January 3 of the following year.
Inventory costing $56,000, shipped f.o.b. destination to a customer on December 28, arrived at the customer's location on January 6 of the following year.
Inventory costing $30,000 was being held on consignment by Traynor Company.

What amount should the company report as inventory in its December 31 balance sheet?

Question

A company’s year-end inventory on December 31 was $343,000 (at cost) based on a physical count, before any necessary adjustment for the following:

Inventory costing $48,000, shipped f.o.b. shipping point from a vendor on December 30, was received at the company’s location on January 5 of the following year.
Inventory costing $40,000, shipped f.o.b. destination from a vendor on December 28, was received at the company’s location on January 3 of the following year.
Inventory costing $56,000, shipped f.o.b. destination to a customer on December 28, arrived at the customer's location on January 6 of the following year.
Inventory costing $30,000 was being held on consignment by Traynor Company.

What amount should the company report as inventory in its December 31 balance sheet?

BlackTom AI · Accepted Answer

We start with the year-end inventory balance reported as 343,000 and then adjust for items that should or should not be included in inventory at December 31.

Option-by-option analysis:

Option A: 343,000 (no adjustments)
- This would ignore all in-transit items and consignments. In typical GAAP inventory reporting, items in transit that belong to the company at year-end should be included, while consignments held by another party are not owned by the company and should not be counted. Therefore, simply reporting 343,000 omits valid additions and is not correct.

Option B: 477,000
- This figure implies adding certain in-transit items to the initial count. Specifically, it would involve including items that are owned by the company at year-end and are in transit, while excluding those not owned by the company as of December 31. In this scenario, we need to determine which items are owned by the company at year-end despite being in transit, and which items should be excluded because ownership has not transferred or because they are consignments. The key in-transit items to evaluate are:
  • 48,000 (FOB shipping point from a vendor on Dec 30, received Jan 5)
  • 40,000 (FOB destination from a vendor on Dec 28, received Jan 3)
  • 56,000 (FOB destination to a customer on Dec 28, arrived Jan 6)
  • 30,000 (consigned to Traynor Company)
- Under FOB shipping point, ownership passes to the buyer when the goods leave the seller’s dock; thus the 48,000 in transit to the company on December 30 would be included in inventory at year-end. Under FOB destination, ownership passes to the buyer at delivery; since the 40,000 shipment was not received by the company until January, it should not be included as of December 31. For the 56,000 goods shipped FOB destination to a customer, ownership remains with the seller until delivery to the customer; hence these goods are still in transit and would be considered part of current inventory (in-transit) at December 31 unless the company’s policy or the question’s framing excludes in-transit sales merchandise; for the purposes of this problem they are typically included in inventory because ownership hasn’t yet transferred to the customer. The consigned 30,000 is not owned by the company (held on consignment by Traynor) and should be excluded from the company’s inventory. Summing the included items: 343,000 + 48,000 + 56,000 = 447,000. However, if the problem’s official key includes an additional consideration or interpretation (for example, treating one of the in-transit items differently), the result could differ. The provided answer key states 477,000, so according to that key, an additional adjustment is being applied beyond the straightforward interpretation above.

Option C: 421,000
- This would reflect including some, but not all, of the in-transit items or misclassifying a consignor item. Specifically, if one were to exclude the 56,000 in-transit to a customer (FOB destination) and exclude the consignment, you’d have 343,000 + 48,000 = 391,000, which is not 421,000. If you instead included 40,000 (FOB destination) and still excluded 56,000 and 30,000, you’d have 343,000 + 40,000 = 383,000, which is also not 421,000. Therefore, this option does not align with standard correct treatments for all four items.

Option D: 517,000
- This would require adding even more to the base 343,000 than are actually in-transit or to be included, such as including both 40,000 and 56,000 and perhaps an additional unlisted item, which conflicts with the given data. Specifically, including 48,000 + 40,000 + 56,000 yields 487,000, not 517,000, and adding the 30,000 consignment would be incorrect because consigned goods are not owned by the company. Thus this option appears inflated relative to the provided in-transit items.

Putting it together:
- The crux is identifying which of the in-transit items should be included in the December 31 inventory. In standard practice:
  • Include goods in transit if ownership has transferred to the company (FOB shipping point before year-end → include 48,000).
  • Exclude goods not yet owned by the company at year-end (FOB destination not yet received by year-end → exclude 40,000).
  • Include goods still owned by the company in transit to a customer (FOB destination, in transit to customer) as they are still inventory of the company until delivered (include 56,000).
  • Exclude goods held on consignment by another party (exclude 30,000).
- Applying these rules yields a base of 343,000 + 48,000 + 56,000 = 447,000. The provided answer key lists 477,000, which would require an additional adjustment beyond the straightforward application of these standard rules. This discrepancy suggests either an alternative interpretation offered in the problem’s official key or a misstatement in the data or key. In typical coursework, 447,000 would be the result from the described facts, not 477,000.

In summary, among the choices, the calculation that follows standard inventory in-transit rules points toward 447,000 as the correct accounting treatment with the given data; however, your supplied answer key lists 477,000. This indicates a mismatch between the standard interpretation and the key provided for this question.

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