If goods in transit are shipped FOB destination, the seller has legal title to the goods until they are delivered.
the buyer has legal title to the goods until they are delivered.
the transportation company has legal title to the goods while the goods are in transit.
no one has legal title to the goods until they are delivered.
The Correct Answer and Explanation is:
The correct answer is: the seller has legal title to the goods until they are delivered.
Explanation:
FOB Destination is a shipping term that stands for “Free On Board Destination.” It defines when the ownership (legal title) and risk of loss for goods transfers from the seller to the buyer during shipment.
- Under FOB Destination, the seller retains ownership and responsibility for the goods until the goods physically arrive at the buyer’s location or specified destination.
- This means the seller holds legal title during transit, and the risk of loss or damage to the goods remains with the seller while the goods are in transit.
- Only once the goods are delivered to the buyer’s destination does the legal title and risk of loss transfer from the seller to the buyer.
This is in contrast to FOB Shipping Point (or FOB Origin) terms, where the buyer takes ownership and risk of the goods once the goods leave the seller’s shipping dock. In FOB Shipping Point, the buyer is responsible for the goods during transit.
Why not the other options?
- The buyer has legal title to the goods until they are delivered.
This is incorrect under FOB Destination terms because the buyer does not gain title until delivery is complete at their location. The buyer assumes responsibility only upon delivery, not before. - The transportation company has legal title to the goods while the goods are in transit.
The carrier (transport company) is simply a custodian or bailee of the goods and does not hold legal ownership/title. Their role is to transport the goods under contract and care but not own the goods. - No one has legal title to the goods until they are delivered.
This is incorrect because legal title always resides with either the seller or buyer, never “no one.” Under FOB Destination, title remains with the seller until delivery.
Additional context:
The significance of FOB terms lies in determining:
- Who bears the risk during shipping
- Who records the inventory
- When sales revenue is recognized for accounting purposes
With FOB Destination, sellers maintain inventory on their books until delivery. This protects buyers from risks during transit such as loss, theft, or damage. Sellers also arrange and pay shipping costs typically in FOB Destination agreements.
In summary, under FOB Destination, the seller keeps legal title to the goods until the goods reach the buyer’s location and are delivered. This is a key point in contracts, shipping logistics, and accounting for businesses involved in the sale of goods.