Question

If goods in transit of $11500 (cost is $7700) are shipped FOB destination at a cost of $1000 and were not included in the count of inventory by the seller or the buyer at their year end of December 31, 2024, then

A. the buyer's inventory is overstated by $11500.
B. the seller's inventory is understated by $7700.
C. the seller's imventory is overstated by $8700.
D. the buyer's inventory is understated by $12500.

Answer 1

The seller's inventory is understated by $8700. Hence, option C is the correct answer.

Step-by-step explanation:

When goods are shipped FOB (Free On Board) destination, the ownership and responsibility for the goods transfer from the seller to the buyer when the goods reach the buyer's destination. In this scenario, the goods in transit of $11,500 represent inventory that still belongs to the seller because they were not included in the count of inventory by either the seller or the buyer at the year end of December 31, 2024.

The cost of these goods is $7,700, so the seller's inventory is overstated by $7,700. Additionally, the cost of shipping FOB destination at $1,000 needs to be added to the seller's overstated inventory, resulting in a total overstatement of $8,700.

Therefore, option C is the correct statement: the seller's inventory is overstated by $8,700.