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?
Based on the information provided, it seems that you are confused about the treatment of FOB (Free On Board) terms in the given transactions.
FOB terms in a sales or purchase agreement determine who takes ownership and responsibility for the goods during transit. There are two common types of FOB terms: FOB shipping point and FOB destination.
FOB shipping point means that the buyer takes ownership and responsibility for the goods as soon as they leave the seller's shipping point. On the other hand, FOB destination means that the seller retains ownership and responsibility for the goods until they reach the buyer's specified destination.
Now, let's analyze the transactions provided:
1. Sold merchandise costing $15,000 to Fischer Limited on account for $20,000, terms 2/10, n/30, FOB shipping point:
- In this transaction, since the terms are FOB shipping point, the ownership and responsibility for the goods transfer to Fischer Limited as soon as the merchandise leaves Norlan Inc's shipping point.
- The freight charges of $1000 were paid by the appropriate party, which suggests that Fischer Limited, being the buyer, is responsible for the freight charges.
- From an accounting perspective, no entry is required for the freight charges in this transaction.
2. Purchased delivery equipment on account for $28,000, terms n/30, FOB destination:
- In this transaction, since the terms are FOB destination, Norlan Inc retains ownership and responsibility for the delivery equipment until it reaches its specified destination.
- The freight charges of $500 were paid by the appropriate party, indicating that Norlan Inc, being the buyer, is responsible for the freight charges.
- From an accounting perspective, you should include a separate entry for the freight charges paid, increasing the delivery equipment's cost. The entry would be:
Debit: Delivery Equipment - $500
Credit: Accounts Payable - $500
In summary, you are correct in noting that there are no entries directly related to FOB terms for each transaction. However, the treatment of freight charges may differ depending on the FOB terms. It is crucial to consider the specific terms and identify the responsible party for the freight charges to determine the appropriate accounting treatment.