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Kate Wilson, an auditor with Sneed chartered accountants is performing a review of Platinum Stereos' inventory account
Kate Wilson, an auditor with Sneed chartered accountants is performing a review of Platinum Stereos' inventory account. Platinum 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 ended was $740,000. However, the following information was not considered when determining that amount.
1. Included in the company’s count were goods with a cost of £250,000 that the company is holding on consignment. The goods belong to Superior Ltd.
2. The physical count did not include goods purchased by Platinum with a cost of £40,000 that were shipped FOB destination on December 28 and did not arrive at Platinum’s warehouse until January 3.
3. included in the inventory account was £17,000 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 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 £49,000 and a cost of £33,000. The goods were not included in the count because they were sitting on the dock.
5. included in the count was £48,000 of goods that were parts for a machine that the company no longer made. Given the high?tech nature of Platinum’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.”
a. complete the schedule that follows, by either adding to or deleting from the preliminary balance of $740,000
ending inventory - as reported ................................................................$740,000
1.
2.
3.
4.
5.
correct inventory ..............................................................................................$458,000
Expert Solution
Answer :
Ending inventory-as reported........................................................................... $740,000
1.
Subtract from inventory: The goods belong to Superior Corporation. Platinum is merely holding them as a consignee............................................................................. (250,000)
2.
No effect-title does not pass to Platinum until goods are received (Jan. 3)................................................................................ 0
3.
Subtract from inventory: Office supplies should be carried in a separate account. They are not considered inventory held for resale...................................................... (17,000)
4.
Add to inventory: The goods belong to Platinum until they are shipped (Jan. 1).................................................................. 33,000
5.
Subtract from inventory: GAAP require that inventory be valued at the lower of cost or market. Obsolete parts should be adjusted from cost to zero if they have no other use............................................................................................... (48,000)
Correct inventory................................................................................................. $510,000
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