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In 2007, the Trinity Company purchased from John the right to be the individual distributor in the western states of product called Halenol.  In payment, Trinity agreed to pay John 20% of gross profit identified from sale of Halenol in 2009.

Trinity uses a periodic inventory system and the LIFO inventory method.  Late in 2008, the information is given below about the Halenol inventory:

Beginning inventory, 1/1/09 (10,000 units @ $30)     $300,000
Purchases (40,000 units @ $30)     1,200,000
Sales (35,000 units @ $60)     2,100,000

By the end of year, the purchase price of Halenol had risen to $40 per unit.  On December 28, 2009, three days before year-end, Trinity is in the position to purchase 20,000 extra units at the $40 per unit price.  Supplier guarantees the units will leave its warehouse on December 30, FOB (free on board) shipping point, and will take 3 days to reach Trinity’s warehouse.  Due to market demand for Halenol, Trinity can easily pass on increased cost to its customers by raising its prices in 2009 to $80 per unit.  Inventory on hand at December 28 is 15,000 units and is enough to meet sales demand for next 6 months. The company does not expect the purchase price of Halenol to change during 2009.

problems:

1) Find out the effect of purchase of extra 20,000 units of Halenol and the payment due John.

2) describe briefly the ethical dilemma which Trinity faces in deciding whether to purchase the extra units or not.

3) prepare a suggestion as to how Trinity and John could have written a contract to avoid this ethical dilemma.

4) What does FOB shipping point mean to Trinity’s inventory records?  What will be the effect if shipment was FOB destination?

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M99686

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