Ch. 7 CPA Exam Practice Questions

1. Nomar Co. shipped inventory on consignment to Seabright Co. that cost $20,000. Seabright paid $500 for advertising that was reimbursable from Nomar. At the end of the year, 70% of the inventory was sold for $30,000. The agreement states that a commission of 20% will be provided to Seabright for all sales. What amount of net inventory on consignment remains on the balance sheet for the first year for Nomar? A: $6,000 Explanation: Nomar includes in its inventory account items of inventory it owns, regardless of its location. Nomar's inventory on consignment at Seabright continues to be owned by Nomar and is included in Nomar's inventory at cost. 70% of the inventory shipped has been sold. Therefore, only 30%, or $6,000 (.30 × $20,000), remains in the ending inventory. The commission and advertising costs are not inventory costs and are not included in the inventory. 2. What is the appropriate treatment for goods held on consignment? A: The goods should be included in the ending inventory of the consignor. Explanation: Consigned goods belong to the consignor and are included in the consignor's ending inventory. 3. How should the following costs affect a retailer's inventory? A: Freight-In Interest on Inventory Loan Increase No effect Explanation: All costs necessary to prepare inventory for sale are capitalized to inventory. Freight-in is such a cost. The goods must be shipped to the seller's location before they can be sold. Interest on inventory loans is a financing cost. It does not contribute to the process of making the inventory ready for sale. 4. Stone Co. had the following consignment transactions during December 2005: Inventory shipped on consignment to Beta Co. $18,000 Freight paid by Stone 900 Inventory received on consignment from Alpha Co. 12,000 Freight paid by Alpha 500 No sales of consigned goods were made through December 31, 2005. Stone's December 31, 2005, balance sheet should include consigned inventory at A: $18,900 Explanation: The $18,900 amount to be included in consigned inventory (this would be included in Stone's ending inventory) = $18,000 + $900 freight. This inventory is owned by Stone. The freight is included because it is a cost necessary to bring the inventory into salable condition and location. The inventory Stone received on consignment is not an asset of Stone's and is not included in Stone's inventory. Stone is helping to sell Alpha's inventory, just as Beta is helping to sell Stone's inventory.