If a purchaser using a perpetual system agrees to freight terms of FOB shipping point, then the
a.Inventory account will be increased.
b.Inventory account will not be affected.
c.seller will bear the freight cost.
d.carrier will bear the freight cost.
The correct answer and explanation is :
The correct answer is:
a. Inventory account will be increased.
Explanation:
When a purchaser uses a perpetual inventory system and agrees to FOB (Free on Board) shipping point freight terms, the costs of shipping goods to their destination are the buyer’s responsibility. This directly affects the way the company records the transaction in its accounting system.
Understanding FOB Shipping Point
- FOB shipping point means that the seller transfers ownership of the goods to the buyer as soon as the goods leave the seller’s premises.
- From that point forward, the buyer is responsible for all transportation costs and bears the risk of loss or damage during transit.
- Since the purchaser assumes responsibility at the shipping point, they must pay for the freight charges.
Effect on Perpetual Inventory System
- Under a perpetual inventory system, every inventory-related transaction is recorded immediately.
- Since freight-in costs are considered a direct cost of acquiring inventory, they must be included in the Inventory account rather than being recorded as an expense.
- The journal entry would be:
Dr. Inventory (Increase) Cr. Cash or Accounts Payable (Decrease) - The additional cost increases the total cost of inventory on hand, which means that when the goods are eventually sold, the cost of goods sold (COGS) will reflect the total cost, including shipping.
Incorrect Answer Choices
- (b) Inventory account will not be affected: This is incorrect because freight costs under FOB shipping point are capitalized into inventory.
- (c) Seller will bear the freight cost: Incorrect, as the buyer is responsible for the cost.
- (d) Carrier will bear the freight cost: Incorrect, since carriers charge either the buyer or seller for shipping services.
Thus, the correct answer is (a) Inventory account will be increased.