Exercise 6-2 Rachel Warren, an auditor with Laplante CPAs, is performing a revie

Question

Exercise 6-2

Rachel Warren, an auditor with Laplante CPAs, is performing a review of Schuda Company’s inventory account. Schuda 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-end was $704,270. However, the following information was not considered when determining that amount.

Prepare a schedule to determine the correct inventory amount. (If an amount reduces the account balance then enter with a negative sign preceding the number , e.g. -15,000, or parenthesis e.g. (15,000). Enter 0 if there is no effect.)

Ending inventory-as reported $

1. Included in the company’s count were goods with a cost of $216,890 that the company is holding on consignment. The goods belong to Harmon Corporation.

2. The physical count did not include goods purchased by Schuda with a cost of $45,270 that were shipped FOB destination on December 28 and did not arrive at Schuda's warehouse until January 3.

3. Included in the inventory account was $18,720 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 $44,900 and a cost of $36,050. The goods were not included in the count because they were sitting on the dock.

5. On December 29, Schuda shipped goods with a selling price of $86,290 and a cost of $51,770 to Reza Sales Corporation FOB shipping point. The goods arrived on January 3. Reza Sales had only ordered goods with a selling price of $10,100 and a cost of $9,900. However, a sales manager at Schuda had authorized the shipment and said that if Reza wanted to ship the goods back next week, it could.

6. Included in the count was $32,670 of goods that were parts for a machine that the company no longer made. Given the high-tech nature of Schuda’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.”

Correct inventory $

Explanation / Answer

SOLUTION

*$51,770 - $9,900 = $41,870

S.No. Transactions Amount ($) Ending inventory-as reported 704,270 1. Subtract from inventory: The goods belong to Harmon Corporation. Schuda is merely holding them as a consignee. (216,890) 2. Add to inventory: The goods belong to Schuda as soon as they are shipped 45,270 3. Subtract from inventory: Office supplies should be carried in a separate account.They are not considered inventory held for resale. (18,720) 4. Add to inventory: The goods belong to Schuda until they are shipped 36,050 5. Add to inventory: Central Sales ordered goods with a cost of $9,900. Schuda should record the corresponding sales revenue of $10,100. Schuda's decision to ship extra "unordered" goods does not constitute a sale. The manager's statement that Central could ship the goods back indicates that Schuda knows this over-shipment is not a legitimate sale. The manager acted unethically in an attempt to improve Schuda's reported income by over-shipping. 41,870* 6. Subtract from inventory: GAAP requires 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. (32,670) Correct Inventory 559,180

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