1. The following information applied to Fenn, Inc.

for year 2:

Merchandise purchased for resale: $400,000

Freight-in: $10,000

Freight-out: $5,000

Purchase returns: $2,000

Fenn's year 2 inventoriable cost was

a. $400,000

b. $404,000

c. $408,000

d. $413,000

Correct Answer: C) $408,000

Notes

(c) Inventoriable costs include all costs necessary to prepare goods for sale. For a merchandising concern
these costs include the purchase price of the goods, freight-in, insurance, warehousing, and any costs
necessary to get the goods to the point of sale (except interest on any loans obtained to purchase the
goods). In this problem, inventoriable costs total $408,000.

2. On December 28, year 2, Kerr Manufacturing Co. purchased goods costing $50,000. The terms were
FOB destination. Some of the costs incurred in connection with the sale and delivery of the goods were
as follows:

Packaging for shipment: $1,000

Shipping: $1,500

Special handling charges: $2,000

These goods were received on December 31, year 2. In Kerr's December 31, year 2 balance sheet, what
amount of cost for these goods should be included in inventory?

a. $54,500

b. $53,500

c. $52,000

d. $50,000

Correct Answer: D) $50,000

Notes

(d) When the shipping terms are FOB destination, the seller bears all costs of transporting the goods to
the buyer. Therefore, the seller is responsible for the payment of packaging costs ($1,000), shipping
costs ($1,500), and the special handling charges ($2,000). The only amount to be included as the buyer's
cost of the inventory purchased is the purchase price ($50,000).

3. On June 1, year 2, Pitt Corp. sold merchandise with a list price of $5,000 to Burr on account. Pitt
allowed trade discounts of 30% and 20%. Credit terms were 2/15, n/40 and the sale was made FOB
shipping point. Pitt prepaid $200 of delivery costs for Burr as an accommodation. On June 12, year 2, Pitt
received from Burr a remittance in full payment amounting to

a. $2,744

b. $2,940

c. $2,944

d. $3,140

Correct Answer: C) $2,944

Notes

(c) Purchases are always recorded net of trade discounts. When more than one trade discount is applied
to a list price, it is called a chain discount. Chain discounts are applied in steps; each discount applies to
the previously discounted price. The cost, net of trade discounts, is $2,800 [$5,000 - (30% × $5,000) =
$3,500; and $3,500 - (20% × $3,500) = $2,800]. Payment was made within the discount period, so the
net purchase price is $2,744 [$2,800 - (2% × $2,800)]. The remittance from Burr would also include
reimbursement of the $200 of delivery costs. Since the terms were FOB shipping point, Burr is
responsible for paying this amount, and must reimburse Pitt, who prepaid the freight. Thus, the total
remittance is $2,944 ($2,744 + $200).