Question

Umatilla Bank and Trust is considering giving Pronghorn Corp a loan. Before doing so, it decides that further discussions with Pronghorn’s accountant may be desirable. One area of particular concern is the Inventory account, which has a year-end balance of $277,880. Discussions with the accountant reveal the following. 1. Pronghorn shipped goods costing $54,380 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 $96,250 that were shipped to Pronghorn FOB destination on December 27 and were still in transit at year-end. 3. Pronghorn received goods costing $27,180 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. Pronghorn shipped goods costing $46,830 to Ehler of Canada FOB destination on December 30. The goods were received in Canada on January 8. They were not included in Pronghorn physical inventory. 5. Pronghorn received goods costing $45,270 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 $277,880.

Answer 1

Answer:

1. Pronghorn shipped goods costing $54,380 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.

• These goods were correctly excluded from the inventory account because the purchase was FOB shipping point, which means that title passes to the buyer once the goods leave the sellers shipyard or warehouse.

2. The physical count of the inventory did not include goods costing $96,250 that were shipped to Pronghorn FOB destination on December 27 and were still in transit at year-end.

• These goods were correctly excluded from the inventory account because the purchase was FOB destination, which means that title passes to the buyer only after the goods are delivered.

3. Pronghorn received goods costing $27,180 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.

• They should have been included in the inventory account because the purchase was FOB shipping point, which means that title passes to the buyer once the goods leave the sellers shipyard or warehouse.

4. Pronghorn shipped goods costing $46,830 to Ehler of Canada FOB destination on December 30. The goods were received in Canada on January 8. They were not included in Pronghorn physical inventory.

• They should have been included in the inventory account because the sale was FOB destination which means that title passes to the buyer only after the goods are delivered.

5. Pronghorn received goods costing $45,270 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 $277,880.

• These goods should have been excluded from the inventory account because the purchase was FOB destination, which means that title passes to the buyer only after the goods are delivered.