Multiple Choice
A measurable obligation arising from agreements, contracts, or laws is called a:
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1. Introduction to Accounting
Types of Accounting
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When goods are shipped FOB destination and the seller pays the freight charges, the buyer:
A
records the freight cost as part of the inventory
B
records the freight cost as a selling expense
C
records the freight cost as a liability
D
does not record any freight cost as part of the inventory
Verified step by step guidance1
Understand the term 'FOB destination': FOB stands for 'Free on Board,' and 'destination' means the seller retains ownership and responsibility for the goods until they reach the buyer's location. The seller is responsible for freight charges in this case.
Recognize the accounting treatment for freight charges under FOB destination: Since the seller pays the freight charges, these costs are not recorded by the buyer as part of the inventory or any other expense.
Clarify why the buyer does not record the freight cost: The buyer does not incur any freight-related expenses because the seller is responsible for these costs. The buyer only records the inventory at the purchase price agreed upon.
Understand the seller's perspective: The seller records the freight charges as a selling expense because they are responsible for delivering the goods to the buyer's location.
Conclude the buyer's accounting treatment: The buyer does not record any freight cost as part of the inventory, liability, or selling expense since the seller bears the freight charges under FOB destination terms.
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