Question

A. The Bookage Company shipped merchandise to Library Corporation on December 28, 2021. Library received the shipment on January 3, 2022. December 31 is the fiscal year-end for both companies. The merchandise was shipped f.o.b. shipping point. Explain the difference in the accounting treatment of the merchandise if the shipment had instead been designated f.o.b. destination.

B. The following inventory transactions took place near December 31, 2021, the end of the Raysut Company’s fiscal year-end:

On January 5, 2022, merchandise costing R.O.8,000 was received from a supplier and recorded as a purchase on that date and not included in the 2021 ending inventory. The invoice revealed that the shipment was made f.o.b. shipping point on December 28, 2021.

On December 29, 2021, the company shipped merchandise costing R.O.12,000 to a customer f.o.b. destination. The goods, which arrived at the customer’s location on January 4, 2022, were not included in Raysut’s 2021 ending inventory. The sale was recorded in 2021.

Merchandise costing R.O.4,000 was received on December 28, 2021, on consignment from the ABC Company. A purchase was not recorded and the merchandise was not included in 2021 ending inventory.

Merchandise costing R.O.6,000 was received and recorded as a purchase on January 8, 2022. The invoice revealed that the merchandise was shipped from the supplier on December 28, 2021, f.o.b. destination. The merchandise was not included in 2021 ending inventory.

Required:

State whether Raysut correctly accounted for each of the above transactions

Indicate the effect of the error (if any) in: accounts receivable, accounts payable, inventory, sales, cost of goods sold.

State the correct balance of ending inventory for Raysut Company as at December 31, 2021, assume the inventory balance prior to these adjustments was R.O. 100,000.

Answer 1

A. Since the goods are shipped f.o.b shippig point, property in the goods has passed from the seller to the buyer the moment the goods are shipped. Therefore, The Bookage Company can recognize sales revenue on December 28, and can remove the cost of the inventory with a debit to cost of goods sold, and a credit to inventory. Library Corporation becomes the new owner as soon as the goods are shipped, and record the inventory in its books on December 28, 2021, even though the goods are received on January 3, 2022.

If however the merchandise had been shipped f.o.b destination, property does not pass from the seller to the buyer until the goods reach their destination. Since the goods reached the buyer only on January 3, 2022, the goods were still technically the property of the seller The Bookage Company. In other words, the The Bookage Company cannot recognize revenue before January 3, and as of December 31, the cost of the goods is to be included in the closing inventory of the seller. Simultaneously, Library Corporation too cannot recognize the inventory in its books before January 3.

B. i. No, the transaction was not correctly recorded.

As the transation was f.o.b shipping point, the purchase should have been recorded on the date of the shipment, i.e December 28, 2021, and the cost of the goods should have been included in closing inventory as on December 31, 2021.

ii. No, the transaction was not correctly recorded.

Since the transaction is f.o.b destination, the sale can be recorded only after the goods reach their destination. Therefore, no sale should have been recorded before January 4, 2022, and the cost of the goods should have been included in the closing inventory as of December 31, 2021.

iii. Yes, the goods have been correctly accounted for.

Raysut Company is a consignee, and therefore the goods are the property of ABC Company. Goods received on consignment should not be recorded as purchase, and the value of the goods on consignment should not be included in the closing inventory of the consignee. They should be included in the closing inventory of ABC Company as of December 31, 2021, if they are still unsold. Raysut Company is only an agent of ABC Company, and earns commission income on goods sold.

iv. Yes, the transaction is correctly recorded, for reasons already explained above.

Transation/Event	Accounts Receivable	Accounts Payable	Inventory	Sales	Cost of Goods Sold
i.	NA	Understated by 8,000	Understated by 8,000	NA	NA
ii.	Overstated by 12,000	NA	Understated by 12,000	Overstated by 12,000	Overstated by 12,000
iii.	NA	NA	NA	NA	NA
iv.	NA	NA	NA	NA	NA

Correct balance of ending inventory for Raysut Company as at December 31, 2021 = $ 100,000 + $ 8,000 + $ 12,000 = $ 120,000.