E8 5 Inventoriable Cost Error Adjustments Werth Company Asks

E8 5 Inventoriable Costserror Adjustments Werth Company Asks You To

Werth Company requests an evaluation of its December 31, 2010, inventory and the necessary adjustments to the accounting records. The company employs the periodic inventory method, and a physical count shows 273,647 units of inventory on hand. Several adjustments are needed due to timing differences, shipping terms, and errors in recording inventory transactions, which impact the correct valuation of ending inventory. Accurate inventory valuation is crucial for proper financial reporting, cost management, and meeting regulatory standards. This report analyzes listed scenarios to determine the correct inventory balance and records adjusting journal entries to rectify the discrepancies.

Paper For Above instruction

Introduction

Accurate inventory valuation at year-end is essential for producing reliable financial statements. Errors related to shipping terms, timing of receipt or dispatch, and mistaken recognition of sales or purchases can lead to significant misstatements. This paper reviews specific inventory-related transactions of Werth Company, determines the correct inventory value as of December 31, 2010, and prepares necessary adjusting journal entries to align the books with the correct inventory valuation.

Analysis of Inventory Scenarios

The following eight scenarios present various issues affecting inventory valuation. Each must be carefully analyzed considering shipping terms (f.o.b. shipping point vs. destination), timing, and recording errors.

1. Unrecorded Purchases Shipped f.o.b. Shipping Point

A merchandise purchase from Browser on December 15 was shipped f.o.b. shipping point on December 29, arriving in January. Since ownership transfers at shipping point, the merchandise should be included in December's inventory. Therefore, an addition of $12,139 must be made to inventory.

Adjustment: Increase inventory by $12,139.

2. Merchandise Sold to Bubbey, Shipped f.o.b. Destination

The merchandise was shipped after December 31, but the sale was recorded as of December 31. Under f.o.b. destination, ownership transfers when the buyer receives the goods. Since the goods were received by Bubbey on January 3, the sale and removal from inventory should be recorded in January, not December. Therefore, inventory should include this merchandise as of December 31, resulting in an addition of $8,563 (cost basis).

Adjustment: Increase inventory by $8,563.

3. Unrecorded Merchandise Receipt from Dudley, Shipped f.o.b. Destination

The merchandise was shipped on December 31 but the invoice not yet received. Ownership does not transfer until receipt under f.o.b. destination; hence, this inventory should be included in December. The invoice amount is $18,209, so the inventory must be increased accordingly.

Adjustment: Increase inventory by $18,209.

4. Merchandise Not Included – Purchase from Minsky Industries

Werth received merchandise on December 31 after the count, with the invoice date December 30. Since the purchase was recorded on December 30 and received on December 31, the merchandise belongs to December’s inventory. The amount of $9,949 must be added.

Adjustment: Increase inventory by $9,949.

5. Inventory Held by Jackel Industries on Consignment

The inventory valued at $12,160 is on consignment from Jackel Industries. The goods remain owned by Jackel until sold by Werth, so they should be included in Werth’s inventory.

Adjustment: No action required; they are correctly included unless indicated otherwise. The scenario indicates inclusion, so no change needed.

6. Merchandise Sold to Sims, Shipped f.o.b. Shipping Point

The merchandise was shipped after December 31, with the sale recorded on December 31. Under f.o.b. shipping point, ownership transfers at shipment, so the inventory should be excluded as of December 31 but included in January. Therefore, the inventory on December 31 remains correct; no adjustment needed.

Adjustment: No change needed.

7. Returned Merchandise from Customer (Misrecorded Return)

An item labeled “Please accept for credit” involving merchandise costing $1,748 and sale price $3,029 was sold but not yet returned or recorded as a return. Since the customer has returned goods, inventory must be increased accordingly—the merchandise costing $1,748 should be added back to inventory, and sales should be reduced.

Adjustment: Increase inventory by $1,748 and decrease sales revenue by $3,029.

8. Merchandise Sold but Missing from Inventory (Error in Recording Return)

The carted merchandise costing $1,748, returned by customer but not yet reflected in books, indicates that inventory was understated. The merchandise should be added back, and sales reduced.

Adjustment: Same as above, a correction of $1,748 in inventory and corresponding reduction of sales.

Calculating Correct Inventory Balance

The starting physical count: 273,647 units (not given in units cost but in total value). Adjustments are predominantly monetary, based on the inventory amounts specified.

Consider the net adjustments:

- Additions: $12,139 + $8,563 + $18,209 + $9,949 + $1,748 = $50,608

- Corrections: subtract the overstated sales related to the returned merchandise (sales reduction of $3,029 but expense impact only affects profit).

Total adjusted inventory value:

Starting count: implied as total in physical units, but with direct monetary adjustments, the corrected inventory value is:

273,647 units + adjustments in dollars = Total inventory value

Since the physical count is in units, the dollar value needs to be estimated based on the known costs (e.g., cost of merchandise involved in each correction). Without specific unit costs, the total monetary correction amounts to $50,608, with adjustments for sales returns.

Final inventory value = Physical count value + total adjustments

Assuming the physical count of 273,647 units corresponds to the inventory value before adjustments, the total inventory after adjustments should include these monetary adjustments proportionally. For simplicity, the total inventory value (assuming uniform cost basis) is calculated as:

Final inventory = Physical count value + $50,608

In practice, the actual numerical total depends on the cost per unit, which is not specified here. The precise monetary inventory at December 31, 2010, therefore equals the counted inventory plus the net corrections, i.e.:

Adjusted Inventory = $273,647 + $50,608 = $324,255

(had we assume the physical inventory in dollar terms, which is implied but not directly specified).

Journal Entries for Adjustments

Based on the above adjustments, the necessary journal entries are:

1. To record the purchase included in December inventory:

   Dr. Inventory $12,139

   Cr. Accounts payable (or relevant account) $12,139

2. To adjust for sale of merchandise shipped after period-end:

   No entry needed since the sale occurred after December 31, and ownership transferred on January 3.

3. To include the unrecorded receipt from Dudley:

   Dr. Inventory $18,209

   Cr. Accounts payable $18,209

4. To add merchandise received after count from Minsky Industries:

   Dr. Inventory $9,949

   Cr. Accounts payable $9,949

5. To record the return of merchandise from customer:

   Dr. Inventory $1,748

   Cr. Cost of Goods Sold (or Sales Returns) $1,748

6. To correct sales revenue for customer return:

   Dr. Sales Revenue $3,029

   Cr. Accounts receivable (or relevant account) $3,029

Conclusion

The proper inventory at December 31, 2010, should incorporate all relevant adjustments for shipments in transit, ownership transfer timing, and returns. The calculated correction amounts lead to an adjusted inventory value of approximately $324,255, considering initial count and monetary adjustments. Proper journal entries ensure the books reflect accurate inventory levels, aiding in reliable financial reporting and compliance.

References

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