Seemore Lens Company (SLC) sells contact lenses FOB destination. For the year en
ID: 2455066 • Letter: S
Question
Seemore Lens Company (SLC) sells contact lenses FOB destination. For the year ended December 31, the company reported Inventory of $72,000 and Cost of Goods Sold of $424,000.
a. Included in Inventory (and Accounts Payable) are $10,400 of lenses held on consignment.
b. Included in the Inventory balance are $5,200 of office supplies held in SLC’s warehouse.
c. Excluded from the Inventory balance are $8,200 of lenses in the warehouse, ready to send to customers on January 1. SLC reported these lenses as sold on December 31, at a price of $15,400.
d. Included in the Inventory balance are $3,100 of lenses that were damaged in December and will be scrapped in January, with no recoverable value.
Prepare the table showing the balances presently reported for Inventory and Cost of Goods Sold, and then displaying the adjustment(s) needed to correctly account for each of items (a)-(d), and finally determining the appropriate Inventory and Cost of Goods Sold balances.
Explanation / Answer
The table with adjustments is as follows:
Notes:
1) Goods sold on consignment basis are treated as a part of inventory of the consignor and not the consignee. In this case, Seemore Lens Company is the consignee and cannot, therefore, treat the goods held as consignment a part of its inventory. Similarly, its cost cannot be treated as a part of cost of goods sold of the SLC. It will be recorded as cost of goods sold, once the goods have been sold by SLC to the third party. Therefore, accounts payable indicating amount due to consignor is not required to be reported in SLC books.
2) Office supplies is not to be treated as a part of inventory. It is to be expensed at the time of purchase itself.
3) Since, SLC sells goods as FOB destination, goods sold will continue to be a part of SLC's inventory till the goods have been delivered by the carrier to the buyer. Therefore, the goods will be included in the inventory as on 31st December. Further, cost of goods sold will be debited at the time of delivery only. So, its present balance will be adjusted with an increase, as the company has recorded the sales on 31st December.
4) No adjustment is required for items scrapped as it continues to be a part of inventory till the time it is disposed off.
Inventory Cost of Goods Sold Current Balance 72,000 424,000 Less Inventory Held on Consignment Basis (a) -10,400 -10,400 Office Supplies Included in Inventory (b) -5,200 0 Add Inventory Treated as Sold on December 31st (c) 8,200 0 Less Inventory Treated as Sold on December 31st included in Cost of Goods Sold (c) 0 -8,200 Adjusted Balance $64,600 $405,400