Chapter 8: Q4E. (page 424)

Colin Davis Machine Company maintains a general ledger account for each class of inventory, debiting such accounts for increases during the period and crediting them for decreases. The transactions below relate to the Raw Materials inventory account, which is debited for materials purchased and credited for materials requisitioned for use.
1. An invoice for $8,100, terms f.o.b. destination, was received and entered January 2, 2017. The receiving report shows that the materials were received December 28, 2016.
2. Materials costing $28,000, shipped f.o.b. destination, were not entered by December 31, 2016, “because they were in a railroad car on the company’s siding on that date and had not been unloaded.”
3. Materials costing $7,300 were returned to the supplier on December 29, 2016, and were shipped f.o.b. shipping point. The return was entered on that date, even though the materials are not expected to reach the supplier’s place of business until January 6, 2017.
4. An invoice for $7,500, terms f.o.b. shipping point, was received and entered December 30, 2016. The receiving report shows that the materials were received January 4, 2017, and the bill of lading shows that they were shipped January 2, 2017.
5. Materials costing $19,800 were received December 30, 2016, but no entry was made for them because “they were ordered with a specified delivery of no earlier than January 10, 2017.”
Instructions -
Prepare correcting general journal entries required at December 31, 2016, assuming that the books have not been closed.

Short Answer

Expert verified

There would be two transactions dated Jan 2, 2017, and Dec 30, 2016 (Transaction no. 1 & 4 respectively) that needs to be corrected.

Step by step solution

Analysis of transaction

1) The purchase was based on f.o.b. destination, so the entry would be recorded on the receiving date of the inventory. As the receiving date of inventory is 28 Dec., there is a need to correct the journal entry.

2) There is no need to correct this transaction as the sale was f.o.b. destination so the sale would be recognized on unloading the inventory.

3) The entry has been recorded correctly because here, the material has been shipped on f.o.b. shipping point.

4) As the purchase is based on f.o.b. shipping point, the purchase would be recognized on the date of shipping. Thus, there is a need to correct the entry.

5) As the order is based on specific delivery, there is no need to correct books of accounts.