Question

Taha Company purchased $8,000 of inventory under terms FOB shipping point. Freight cost amounted to $200. The cost of inventory and freight were paid with cash. Which of the following shows how the recognition of this purchase, including freight costs if applicable, will affect Taha’s financial statements?

Answer 1

Taha Company's purchase of inventory for $8,000 with an additional $200 freight cost will result in an $8,200 debit to Inventory and a credit to Cash on their financial statements, affecting the balance sheet by increasing inventory and decreasing cash.

Step-by-step explanation:

When Taha Company purchases inventory of $8,000 under terms FOB shipping point, it means that the company is responsible for the freight costs as soon as the goods leave the seller’s premises. In this case, the company also paid $200 in freight costs. Consequently, in Taha Company's financial statements, the inventory cost will be recorded at the purchase cost plus freight, resulting in an inventory value of $8,200.

The journal entry to record the transaction would include a debit to Inventory for $8,200 and a credit to Cash for the same amount. This reflects that inventory has increased and cash has decreased by $8,200. Therefore, on the balance sheet, the inventory account will increase, and the cash account will decrease by these amounts.

Answer 2

An asset account will decrease by $8,200 (cash account) while another asset account will increase by $8,200 (merchandise inventory), so the total assets in the balance sheet will not change. Since the goods have not been sold yet, they will not affect the income statement.

Step-by-step explanation:

When a sale is made free on board (FOB) shipping point, the buyer takes ownership of the goods at the seller's shipping dock and must pay the shipping costs.