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4. Zaheer Abbas, an auditor with Saeed CPAs, is performing a review of K Company's inventory account. K Company 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 $37.000. However, the following information was not considered when deterr amount. 1. Included in the company's count were goods with a cost of $125,000 that the company is holding on consignment. The goods belong to S Corporation. 2. The physical count did not include goods purchased by K Company with a cost of $20,000 that were shipped FOB destination on December 28 and did not arrive at K Company's warehouse until January 3. 3. Included in the inventory account was $8,500 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 was 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 $20,000 and a cost of $15,000. The goods were not included in the count because they were sitting on the dock. 5. On December 29 K Company shipped goods with a selling price of $40,000 and a cost of $30,000 to District Sales Corporation FOB shipping point. The goods arrived on January 3. District Sales had only ordered goods with a selling price of $5,000 and a cost of $4,000. However, a sales manager at k Company had authorized the shipment and said that if District wanted to ship the goods back next week, it could. 6. Included in the count was $20,000 of goods that were parts for a machine that the company no longer made. Given the high-tech nature of K Company'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. Instructions: Prepare a schedule to determine the correct inventory amount. Provide explanations for each item above, saying why you did or did not make an adjustment for each item. Inventory balance before adjustment, Dec 31 37,000 Goods held on consignment To be excluded, as the goods do not belong to k Company (125,000) Goods shipped FOB Destination Correctly excluded as title to the goods passed to K Company only on Jan 3 Office supplies included in inventory To be excluded, as office supplies is not part of inventory (8,500) Goods sitting on 4. loading dock To be included in inventory count, as the goods are yet to be shipped + 15,000 Goods sitting on loading dock To be included in inventory count, as the goods are yet to be shipped + 15,000 Goods sold on approval To be included in inventory count, as a concluded sale has not yet taken place of part of the goods 5. + 26,000 To be written off, as they will not bring any future economic benefit 6. Obsolete goods (20,000) Adjusted inventory balance, Dec 31 (75,500)
