I need help on the freight charges of each transaction, I always get confused when I see the FOB’s.
Presented here are selected transactions for Norlan Inc during September of the current year. Norlan uses a perpetual inventory system.
Sold merchandise costing $15,000 to Fischer limited on account for $20,000, terms 2/10, n/30, FOB shipping point.
1. Freight charges of $1000 were paid by the appropriate party on the above transaction.
Purchased delivery equipment on account for $28,000, terms n/30, FOB destination.
2. Freight charges of $500 were paid by the appropriate party on the above transaction.
When I look up the definition for the FOB’s, I come to the conclusion that there are no entries for each of the transactions. So am I right?
When it comes to FOB (Free On Board) shipping terms, it determines the point at which ownership and responsibility for the goods being shipped transfers from the seller to the buyer. There are two common types of FOB terms: FOB shipping point and FOB destination.
- FOB Shipping Point: This term means that ownership and risk transfer from the seller to the buyer once the goods are loaded onto the transportation carrier at the seller's location. It also means the buyer is responsible for the freight charges and any damage or loss that may occur during transit.
- FOB Destination: This term means that ownership and risk transfer from the seller to the buyer once the goods reach the buyer's designated destination. The seller is responsible for the freight charges and any damage or loss that may occur during transit.
Now, let's apply this information to the given transactions:
1. Sold merchandise costing $15,000 to Fischer Limited on account for $20,000, terms 2/10, n/30, FOB shipping point.
Since the FOB terms are shipping point, the ownership and responsibility for the goods transfer to Fischer Limited once the goods are loaded onto the transportation carrier. In this case, the freight charges of $1000 were paid by the appropriate party. Since the buyer (Fischer Limited) is responsible for the freight charges, they would add this expense to the cost of the merchandise and account for it accordingly. As a result, there would be no separate entries related to freight charges for this transaction.
2. Purchased delivery equipment on account for $28,000, terms n/30, FOB destination.
Since the FOB terms are destination, the ownership and responsibility for the delivery equipment will transfer to Norlan Inc once the equipment reaches their designated location. In this case, the freight charges of $500 were paid by the appropriate party. Since the seller is responsible for the freight charges, Norlan Inc would not have to add this expense to the cost of the equipment. Instead, the seller would have incurred the cost of $500 for the freight charges and should be recorded in their books.
Therefore, based on the information given, it seems there would be no separate entries related to freight charges for either transaction, as the appropriate party already paid for the freight expenses according to the FOB terms.