amount. The amount is deducted before any purchase discount is computed. For ex-
ample, assume that the merchandise returned to Quantum on January 22 was only part
of an overall purchase of $9,000 with terms 2/10, n/30. If Online pays within the dis-
count period, it would deduct a discount of $80, or ($9,000 $5,000)2%.TRANSPORTATION COSTS AND SALES TAXES
Merchandise businesses incur transportation costs in selling and purchasing mer-
chandise. In addition, a retailer must also collect sales taxes in most states. In this sec-
tion, we briefly discuss the unique aspects of accounting for transportation costs and
sales taxes.Transportation Costs
Does the buyer or the seller pay transportation costs? It depends upon when the own-
ership (title) of the merchandise passes from the seller to the buyer.^5 The terms of a
sale should indicate when the ownership (title) of the merchandise passes to the buyer.
The ownership of the merchandise may pass to the buyer when the seller delivers
the merchandise to the transportation company or freight carrier. For example,
DaimlerChryslerrecords the sale and the transfer of ownership of its vehicles to deal-
ers when the vehicles are shipped. In this case, the terms are said to be FOB (free on
board) shipping point. This term means that DaimlerChrysler is responsible for the
transportation charges to the shipping point, which is where the shipment originates.
The dealer then pays the transportation costs to the final destination. Such costs are
part of the dealer’s total cost of purchasing inventory and should be added to the cost
of the inventory by debiting Merchandise Inventory.
To illustrate, assume that on January 19, Online Solutions buys merchandise from
Data Max on account, $2,900, terms FOB shipping point, and prepays the transporta-
tion cost of $150. Online records these two transactions as follows:226 Chapter 5 Accounting for Merchandise Operations
Describe the accounting
for transportation costs
and sales taxes.5
5 The transfer of ownership (title) also determines whether the buyer or seller must pay other costs, such
as the cost of insurance while the merchandise is in transit.SCF BS IS
—AcLc —OT AcT —Jan. 19 Merchandise Inventory 2,900
Accounts Payable—Data Max 2,900
19 Merchandise Inventory 150
Cash 150The ownership of the merchandise may pass to the buyer when the buyer receives
the merchandise. In this case, the terms are said to be FOB (free on board) destina-
tion. This term means that the seller delivers the merchandise to the buyer’s final
destination, free of transportation charges to the buyer. The seller thus pays the trans-
portation costs to the final destination. The seller debits Transportation Out or Delivery
Expense, which is reported on the seller’s income statement as an expense.