Question

Alpha purchased inventory on credit with terms FOB shipping Point (periodic Inventory system). The inventory was shipped to Alpha but not received. Alpha recorded the purchase and included it in ending.

What is the JE?

Are assets, liabilities or net income; understated, overstated, or neither? Why?

Answer 1

Under Free-on-board (FOB) Shipping point the ownership and possession of the goods transferred to the buyer when goods reached to the buyer place/destination. Under FOB shipping point the inventory in-transit are included in the seller inventory and purchase is not recorded by the buyer until goods reached to his place.

Therefore, in the given case, inventory shipped to Alpha but not received required no journal entry and does not affect Alpha inventory.

But the Alpha recorded the purchase and included it in ending inventory, it means below journal entry is passed by Alpha:

Purchases account-------------------Dr

Accounts payable----------------Cr

The above journal entry results in overstated assets because of purchase recorded and includes it in their inventory. the liabilities of the Alpha also overstated because of accounts payable increases

Assets = Overstated

Liabilities = Overstated

Net income = No effect

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