Bank of Epping is considering giving Hooton Ltd a loan. Before doing so, the bank decides that

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Bank of Epping is considering giving Hooton Ltd a loan. Before doing so, the bank decides that further discussions with Hooton’s accountant may be desirable. One area of particular concern is the inventory account, which has a year-end balance of $147 500. Discussions with the accountant reveal the following:

1. Hooton Ltd sold goods costing $17 500 to Moghul Ltd FOB shipping point on 28 June. The goods are not expected to arrive in India until 12 July. The goods were not included in the physical inventory because they were not in the warehouse.

2. The physical count of the inventory did not include goods costing $47 500 that were shipped to Hooton Ltd FOB destination on 27 June and were still in transit at year-end.

3. Hooton received goods costing $12 500 on 2 July. The goods were shipped FOB shipping point on 26 June by Cellar Ltd. The goods were not included in the physical count.

4. Hooton sold goods costing $20 000 to Sterling of Canada FOB destination on 30 June. The goods were received in Canada on 8 July. They were not included in Hooton’s physical inventory.

5. Hooton received goods costing $22 000 on 2 July that were shipped FOB destination on 29 June. The shipment was a rush order that was supposed to arrive on 30 June. This purchase was included in the ending inventory of $147 500.

6. Goods costing $25 000 have been in inventory for more than 12 months and are unlikely to be sold.


Required

(a) Determine the correct inventory amount on 30 June.

(b) Why is it important for the Bank of Epping to determine the correct amount for inventory before granting a loan to Hooton Ltd?  

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Financial Accounting Reporting Analysis And Decision Making

ISBN: 9780730313748

5th Edition

Authors: Shirley Carlon, Rosina Mladenovic Mcalpine, Chrisann Palm, Lorena Mitrione, Ngaire Kirk, Lily Wong

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