Penguin Parts, Inc., a nonpublic company following U.S. GAAP, is preparing its fiscal-year financial statements for the year ended February 28, Year 7. Christina Whitman, a staff accountant, prepared a memo to inform Robert Jensen, the controller, about the inventory issues for Penguin Parts. Robert has asked you to review the documentation and revise the memo, correcting any errors. Penguin uses a periodic system of inventory. To revise the document, click on each segment of underlined text below and select the needed correction, if any, from the list provided. If the underlined text is already correct in the context of the document, select [Original Text] from the list. If removal of the underlined text is the best revision to the document, select [Delete Text] from the list if available. -------- Original Message -------- From: Christina Whitman, Staff Accountant Sent: March 4, Year 7, at 16:31:45 To: Robert Jensen, Controller Subject: Update on Inventory Accounting for Penguin Parts, Inc. Robert, Penguin Parts has been trying to reach an agreement with Domestique Cycling to sell products to high-end bicycle manufacturers. On February 1, Domestique and Penguin reached a consignment agreement for Domestique to act as an agent selling Penguins products. On February 5, Penguin shipped inventory costing $225,000 to Domestique. When the inventory was shipped, Penguin accrued revenue equal to the cost of the inventory on consignment. From the February consignment statement, Domestique sold $100,000 of the inventory for $360,000. For February, Penguin recorded $260,000 in revenue and commission expense of $104,000. Perry Short was recently promoted to purchasing manager for Penguin. After soliciting offers from multiple vendors, he purchased Adelie Screws from Elite Importers because the cost per box was listed at $15, which was lower than the former recorded cost per unit of $20. When the purchase was recorded, the inventory of Adelie Screws was recognized at $18,000 ($15 per unit). As part of his training, management provided Perry feedback on the process of finding products that will arrive in a timely manner at competitive prices. A warehouse worker performed a physical inventory count after the close of business on February 28 and reported that there were 80 Chatham Ball Bearings on hand. After reconciling inventory, the number of Chatham Ball Bearings recorded for the inventory calculation is 215 units. The Bohemian Hammers were introduced in January Year 7 and were marketed as a superior product. Unfortunately, it turned out that these hammers were inferior to existing products, driving down the price. The Bohemian Hammers have a unit disposal cost of $0.50, and Penguins normal profit margin is 10% of the selling price. For financial reporting for the year ended February 28, Year 7, to account for the Bohemian Hammers price decrease, cost of goods sold is increased by $22,500, decreasing inventory by $22,500. Best Regards, Christina Whitman

Invoice

Elite Importers, Inc.Date: 2/12/Year 7PO Box 3321Invoice #: 25698Miami, FL 33101Customer ID: 1285

Payment is due to the above address by March 10, Year 7. NO discount is provided for early payment.

Ship To:Penguin Parts, Inc.7501 Explorer RoadChicago, IL 60605DESCRIPTIONPRICE/UNITUNITSTOTALAdelie screws (100 count box)$15.001,200$18,000Shipping costs 6,000Expedited service fee 2,400Transit insurance 1,200 TOTAL$27,600

Thank you for your business!

FYI: I rush ordered the screws because Elites standard delivery time is 3 weeks, and we needed to have the screws delivered within 4 days.

- Perry 2/15

Blue Springs HeraldFebruary 28, Year 7Price of Bohemian Hammers DropsCADE, TN The price of Bohemian Hammers has fallen because multiple studies have shown that Bohemian Hammers perform worse than Fusion Hammers. Fusion Hammers are less expensive, more durable, and transfer power better.

Summary of Inventory Meeting on February 28, Year 7

A meeting was called as a result of the Bohemian Hammer price drop. Below is a summary of the discussion.

Bohemian Hammers are a new product that was released in January Year 7. Penguin Parts purchased 5,000 hammers from the manufacturer on January 3, Year 7, for $15 apiece. The initial demand for Bohemian Hammers was moderate, and Penguin sold a total of 3,500 units in January and February. Initially, Bohemian Hammers were selling for $55 apiece, but after studies showing their inferiority were released, Penguin Parts expects to sell Bohemian Hammers for $3 apiece. The price for Penguin Parts to buy Bohemian Hammers from the manufacturer is now $2 apiece.

Penguin Parts accounts for its Bohemian Hammers inventory using the LIFO method.

Inventory Schedule

Penguin Parts, Inc.

Inventory Schedule

Chatham Ball Bearings

Report Covers February 1, Year 7 - March 3, Year 7

Date of last reconciliation with physical inventory count1/31/Year 7Number of units reported on 1/31/Year 7 financial records183Number of units on hand on 1/31/Year 7183

FEBRUARY INVENTORY RECONCILIATION NOT YET COMPLETE

Date order placed/ receivedDate inventory shippedDate inventory receivedVendor/CustomerQuantity orderedQuantity soldNotes03/01/Yr703/02/Yr703/03/Yr7Expedition Machinery 40FOB shipping point02/28/Yr702/28/Yr703/02/Yr7Aerospace Industries 25FOB destination02/27/Yr702/28/Yr703/01/Yr7Engineering Supply110 FOB shipping point02/25/Yr702/26/Yr702/27/Yr7Expedition Machinery 60FOB shipping point02/15/Yr702/16/Yr702/17/Yr7Expedition Machinery 30FOB shipping point02/14/Yr702/15/Yr702/16/Yr7Aerospace Industries 25FOB destination02/04/Yr702/05/Yr702/06/Yr7Engineering Supply110 FOB shipping point02/03/Yr702/04/Yr702/05/Yr7Expedition Machinery 43FOB shipping point02/02/Yr702/03/Yr702/04/Yr7Aerospace Industries 30FOB destinationTotal 220 253

CONSIGNMENT AGREEMENT

THIS AGREEMENT (the Agreement) made on this First day of February, Year 7, by and between Penguin Parts, Inc., (the Consignor) and Domestique Cycling (the Consignee).

1. Consignment of Goods

The Consignor shall deliver the Consigned Goods for consignment to the Consignee. The Consigned Goods shall remain the sole property of Consignor until sold. The title to and property of the Consigned Goods shall remain with the Consignor until such time as the Consigned Goods are purchased by a third party.

2. Sale of the Consigned Goods

The Consignee agrees to use its best efforts to sell the goods on behalf of the Consignor on such terms and at such prices as shall from time to time be designated by the Consignor.

3. Payments

For each calendar month, the Consignee agrees, upon sale, to receive the sale proceeds due to the Consignor and to deliver the sales proceeds, after deduction of all commission, to the Consignor together with a statement reporting the sale of Consigned Goods by the 5th business day of the following month.

4. Commissions

The Consignee agrees to accept as full payment a commission equal to 40% of the gross sales price.

IN WITNESS WHEREOF, the parties have signed this Agreement as of the date first set forth above.

Consignee: Consignor:Peter Oberman Larry C. WinchesterPeter Oberman Larry WinchesterVice President of Sales Vice President of SalesDomestique Cycling Penguin Parts, Inc