Given the following items and costs as of the balance sheet date, determine the value of Light Company's merchandise inventory. - $2,400 goods sold by Light to another company. The goods are in transit and shipping terms are FOB shipping point.
- $3,400 goods sold by another company to Light. The goods are in transit and shipping terms are FOB shipping point.
- $4,400 owned by Light but in the possession of another company, the consignee.
- Damaged goods owned by Light that originally cost $5,400 but now have an $1,200 net realizable value.

Light Company

Merchandise Inventory:

Goods $2,400 sold on FOB shipping point =            $0

Goods $3,400 bought on FOB shipping point =       $3,400

Goods $4,400 on consignment               =                 $4,400

Goods $5,400 with net realizable value of $1,200 = $1,200

Value of inventory owned by Light Company     =  $9,000

Explanation:

a) Goods $2,400 sold on FOB shipping point: FOB shipping point means Free on Board shipping point.  This trade term specifies when ownership right is established, that it is at the shipping point and not the destination of the goods when the buyer takes possession.  The ownership was transferred to customer at shipping point with all risks and benefits.  They no longer belong to Light and are therefore not part of Light's inventory after the shipment.

b) Goods $3,400 bought on FOB shipping point:  As explained above, the ownership right and obligation were transferred at shipping point.  The goods belong to Light as it is the lawful owner based on the shipping term.

c) Goods $4,400 on consignment:  Goods on consignment do not belong legally to consignee though they are at his physical possession.  They belong to the consignor until they are sold to a third party.

d) Goods $5,400 with net realizable value of $1,200: The value of an item is not actually the cost but what it can be sold for.  This is especially so for an item that had previously suffered some damage.  The net realizable value is therefore to be used to account for the damaged goods so that profit is not overstated.

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