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In an annual audit at December 31, 2013, you find the following transactions near the

closing date:
1. Merchandise costing $625 was received on December 28, 2013, and the invoice was
not recorded. You located it in the hands of the purchasing agent; it was marked “on
consignment.”
2. A packing case containing products costing $816 was standing in the shipping room
when the physical inventory was taken. It was not included in the inventory because it
was marked “Hold for shipping instructions.” Your investigation revealed that the
customer’s order was dated December 18, 2013, but that the case was shipped and the
customer billed on January 10, 2014. The product was a stock item of your client.
3. Merchandise received on January 6, 2014, costing $720 was entered in the acquisitions
journal on January 7, 2014. The invoice showed shipment was made FOB suppliers
warehouse on December 31, 2013. Because it was not on hand December 31, it was not
included in inventory.
4. Merchandise costing $1,822 was received on January 3, 2014, and the related
acquisition invoice recorded January 5. The invoice showed the shipment was made on
December 29, 2013, FOB destination.
5. A special machine, fabricated to order for a customer, was finished and in the shipping
room on December 31, 2013. The customer was billed on that date and the machine
excluded from inventory, although it was shipped on January 4, 2014.

Required
Assume that each of the amounts is material.
a. State whether the merchandise should be included in the client’s inventory.
b. Give your reason for your decision on each item.*

SOLUTION

a. 1. Exclude
2. Include
3. Include
4. Exclude
5. Exclude

b. 1. Goods held “on consignment” do not belong to the consignee, and should
not be included in inventory.
2. Normally title to a stock item does not pass to the customer until shipment,
even though it has been set aside. Therefore it should be included in
inventory.
3. Title to goods shipped F.O.B. shipping point normally passes to the buyer
on delivery to the transportation agency, and in this instance the goods
belong to your client at December 31, 2013. There is an error in recording
the acquisition.
4. This merchandise would be excluded because title does not pass to buyer
on an F.O.B. destination shipment until delivery to the buyer. Since it was
not received until January 2014, there is no basis for including it in
inventory.
5. Since this machine is fabricated to the customer’s order, title to customer
made-merchandise passes to the buyer as materials and labor are
appropriated to the job. When the job is completed and ready for shipment
as in this case, it may be considered as a completed sale.