Floyd Co. uses a periodic inventory system and counted the inventory on December 31, 20×5. The total inventory counted added up to $6,876,500 before taking into account the following:
– Late in the day on December 31, goods costing $256,000 were sold for $510,000. These goods had been counted earlier in the day. The sale was recorded on January 3, 20×6. The cheque from the customer in the amount of $510,000 was also deposited on January 3, 20×6.
– Goods costing $48,500 were shipped from a supplier on terms FOB shipping on December 28, 20×5 and were delivered on January 4, 20×6. The invoice was recorded as a payable on January 4, 20×6.
– Goods costing $65,200 were shipped from a supplier on terms FOB destination on December 30, 20×5 and were delivered on January 7, 20×6. The invoice was recorded as a payable on January 7, 20×6.
– The inventory count did not include $367,000 of goods held on consignment by some of Floyd’s customers.
The company’s unadjusted trial balance as at December 31, 20×5 showed a balance of $6,342,000 in the Merchandise Inventory account and a balance of $17,536,000 in the Purchases of Merchandise account.
Required – Prepare the journal entry to adjust Floyd’s Inventory account and any other necessary adjusting journal entry/entries as at December 31, 20×5.
As the sale is done, it should not be included in the closing stock, though the recording of the transaction is done at later date, the ownership has passed, hence this needs to be deducted.
As the terms of the sale is FOB shipping, the ownership got transferred to Floyd’s on December 28. Hence this needs to be included in the closing stock.
This transaction is not to be included in the closing stock, as the ownership passes once it reaches destination. Hence, it is rightly not included.
Goods held on consignment needs to be included in closing stock, as the ownership of the goods lies with Floyd.
Journal entry to correct is as follows:
So, closing stock value needs to be increased by $7,036,000.00 – $6,342,000 =$694,000.
Correction entry for the first transaction is
Accounts receivable a/c Dr $510,000
To sales a/c —-Cr $510,000.
(Being sales recorded)
Cost of goods sold a/c Dr — $256,000
To Merchandise inventory a/c Cr $256,000.
(Being merchandise inventory correction entry made)
Goods in transit a/c Dr $48,500
To Accounts payable a/c Cr $48,500.
(Being goods intransit recorded in the books)
Correction entry to be made is as follows:
Inventory on record =$6,342,000 -$256,000
But on reconciliation, the entry to be made for amount $7,036,000 – $6,086,000.
Entry to be made is as follows:
Merchadise inventory a/c Dr $950,000.
To Cost of goods sold a/c Cr ——$950,000.
(Being correction entry made for physical count)