Question

a. Jovad Company ships merchandise to Martin Company on December 30. The merchandise reaches the buyer on January 6. indicate the terms of sale that will result in the goods being included in (1) Jovad's December 31 inventory, and (2) Martin's December 31 inventory. b. Under what circumstances should Jovad Company included consigned goods in its inventory?

Answer 1

Solution:-

Before you solve this question you should know the definition of both FOB destination and FOB shipping point:-

FOB destination: Terms indicating that the seller will incur the delivery expense to get the goods to the destination. With terms of FOB destination the title to the goods usually passes from the buyer to the seller at the destination. This means that goods in transit should be reported as inventory by the seller, since technically the sale does not occur until the goods reach the destination.

FOB shipping point: Terms indicating that the buyer must pay to get the goods delivered. (The buyer will record freight-in and the seller will not have any delivery expense.) With terms of FOB shipping point the title to the goods usually passes to the buyer at the shipping point. This means that goods in transit should be reported as a purchase and as inventory by the buyer. The seller should report a sale and an increase in accounts receivable.

(1) Jovad's December 31 inventory:-

Jovad Company ships merchandise to Martin Company on December 30, terms FOB destination. The merchandise reaches the buyer on January 6.

(2) Martin's December 31 inventory:-

Jovad Company ships merchandise to Martin Company on December 30, terms FOB shipping point. The merchandise reaches the buyer on January 6.