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?
To understand the effect of FOB (Free on Board) terms on the transactions, we need to consider who is responsible for the freight charges and when the ownership of the goods transfers.
In the case of the first transaction, it states that the FOB terms are shipping point. This means that the ownership and responsibility for the goods transfer from Norlan Inc to Fischer Limited at the point of shipment. In this case, since the FOB terms are shipping point, the buyer (Fischer Limited) is responsible for the freight charges. Norlan Inc paid $1000 for the freight charges, which suggests that they paid it on behalf of Fischer Limited.
Therefore, an appropriate entry for the freight charges on this transaction would be:
Debit: Accounts Receivable (Fischer Limited) - $1000
Credit: Freight Charges Payable - $1000
Regarding the second transaction, the FOB terms are destination, which means that the ownership and responsibility for the goods transfer from the seller (Norlan Inc) to the buyer at the destination. Since it is FOB destination, Norlan Inc is responsible for the freight charges. The fact that $500 was paid by the appropriate party indicates that Norlan Inc likely paid the freight charges.
Hence, an appropriate entry for the freight charges on this transaction would be:
Debit: Delivery Equipment - $500
Credit: Cash or Accounts Payable (whichever is used to record the payment) - $500
In summary, there should be entries for the freight charges in each of the transactions, taking into account the FOB terms specified.