Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 5 Accounting for Merchandise Operations 227

To illustrate, assume that on January 24, Online Solutions sells merchandise to

Miller Company on account, $4,700, terms FOB destination. The cost of the merchan-

dise sold is $2,750, and Online pays the transportation cost of $350. Online records the

sale, the cost of the sale, and the transportation cost as shown below.

Seller pays freight costs and debits Transportation Out TITLE

passes

to buyer

TITLE

passes

to buyer

Buyer pays freight costs and debits Merchandise Inventory

Terms: FOB Shipping Point

Terms: FOB Destination

Freight

Costs

Shipping Point Destination

Freight

Costs

SELLER BUYER

Exhibit 11

Transportation Terms

Sometimes FOB shipping point and FOB destination are expressed in terms of the

location at which the title to the merchandise passes to the buyer. For example, if

Toyota Motor Co.’s assembly plant in Osaka, Japan, sells automobiles to a dealer in

Chicago, FOB shipping point could be expressed as FOB Osaka. Likewise, FOB desti-

nation could be expressed as FOB Chicago.

Shipping terms, the passage of title, and whether the buyer or seller pays the trans-

portation costs are summarized in Exhibit 11.

As a convenience to the buyer, the seller may prepay the transportation costs, even

though the terms are FOB shipping point. The seller will then add the transportation

costs to the invoice. The buyer will debit Merchandise Inventory for the total amount

of the invoice, including the transportation costs.

To illustrate, assume that on January 14, Online Solutions sells merchandise to

Golden Company on account, $8,000, terms 2/10, n/30, FOB shipping point. Online

SCF BS IS

—AcSEc Rc

—ATSET Ec

OT ATSET Ec

Jan. 24 Accounts Receivable—Miller Company 4,700

Sales 4,700

24 Cost of Merchandise Sold 2,750

Merchandise Inventory 2,750

24 Transportation Out 350

Cash 350