Question

In: Accounting

Wiley Coyote Company placed an order to purchase 10,000 rocket packs from Acme Company on December...

Wiley Coyote Company placed an order to purchase 10,000 rocket packs from Acme Company on December 28, 2019. Acme shipped the rocket packs on December 29, 2019 and they arrived at Wiley Coyote’s plant on January 3, 2020. Discuss which company would include these materials in its ending inventory at December 31, 2019, based on whether the shipping terms were FOB Shipping Point or FOB Destination.   Be sure to explain why your answer might differ based on the shipping terms.

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Expert Solution

Solution:

FOB Shipping Point and FOB Destination are the two shipping terms which determines the point at whch the title of goods transfers from the seller to the buyer.

The two shipping terms are explained below which determines which company would include the materials in its ending inventory as at December 31, 2019 :

Under FOB Shipping Point: FOB Shipping Point indicates that the title and responsibility of goods are transferred from the seller to the buyer when the goods are placed on the carrier. The legal title of goods are transferred to the buyer when the goods are placed at the shipping point. Since the buyer becomes the owner of the goods at the shipping point, these goods becomes part of the buyer's inventory while in transit. Thus, in the given question Acme Company the seller shipped the materials on December 29, 2019. This is the point where the legal title of goods are transferred to the Willy Coyote Company and became the owner of the materials and Willy Coyote Company will include these materials in its ending inventory at December 31, 2019.

Under FOB Destination: FOB destination indicates that the title of the goods are transferred at the buyer's loading dock or warehouse which means that the seller legally owns the goods and is responsible for the goods during the shipping process. These goods will remain in the inventory of the seller during the shipping process. The seller will record the sales only when the goods arrives at the receiving dock and then buyer will record such goods in his inventory. Thus, in the given question materials arrived at the buyer's Willy Coyote plant on January 3, 2020 and the legal title of materilas will be transferred to the Willy Coyote at this point. Acme Company will remain the owner of the materials during the shipping process. Since the materials were on transit on December 31, 2019, these materials will be the part of the ending inventory of Acme Company on December 31, 2019.

Final Summary:

Under FOB Shipping Point: Materials will be included in the ending inventory of the buyer Will Coyote Company as on December 31, 2019.

Under FOB Destination: Materials will be included in the ending inventory of the seller Acme Company as on December 31, 2019.

ekkarill92 answered 1 year ago
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