Chapter 7
Inventory: Merchandising Transactions
180
Assume that Tools 4U had inventory shipped FOB shipping
point. This means that Tools 4U must pay the cost of shipping.
Suppose the shipping charge totalled $100 and was paid in cash on
January 2.This amount must be included in the inventory account.
The journal entry is shown in Figure 7.12.
FOB Destination
FOB destination indicates that ownership of the purchased items changes when the goods arrive
at the buyer’s place of business. In other words, ownership changes at the point of destination. In
this case, the seller may have a fleet of vehicles and uses them to deliver goods to its customers.
Thus, the seller pays for the shipping and is responsible for the items while they are in transport.
If anything happens to the items while they are being transported, the seller bears the risk of loss.
The seller records revenue earned and the buyer records an increase to inventory once the goods
reach their destination (the buyer’s place of business). The seller also records the cost of shipping
the goods as an expense.This expense is part of the seller’s cost of doing business.
Suppose that Tools 4U shipped inventory to a customer FOB destination on January 3. Tools 4U
must pay the cost of shipping because it is the selling company. The shipping cost is a delivery
expense. Suppose that it cost Tools 4U $120 to ship the order and this amount was paid in cash.
The journal entry for this transaction is shown in Figure 7.13.
Journal
Page 1
date
2016
account title and explanation
debit
Credit
Jan 3 Delivery expense
120
Cash
120
To record shipping expenses on a customer order
______________
fIGuRe 7.13
No change in owner’s equity
BALANCE SHEET
INVENTORY
CURRENT ASSETS
CASH
PREPAID
EXPENSES
PROPERTY, PLANT
& EQUIPMENT
ACCOUNTS
RECEIVABLE
LONG-TERM
ASSETS
ACCOUNTS
PAYABLE
– $100 CR
+ $100 DR
CURRENT LIABILITIES
UNEARNED
REVENUE
BANK LOAN
OWNER’S EQUITY
OWNER’S
CAPITAL
OWNER’S
DRAWINGS
LONG-TERM
LIABILITIES
Journal Page 1
date
2016
account title and explanation
debit Credit
Jan 2 Inventory
100
Cash
100
Paid for freight costs
______________
fIGuRe 7.12
