Question

Taha Company purchased $8,000 of inventory under terms FOB destination. Freight in amounted to $200. All transactions were paid with cash. Is Taha responsible for the freight cost?

Answer 1

Yes, Taha Company is responsible for the $200 freight cost as per the FOB destination terms. The payment method being cash does not alter this obligation, emphasizing the importance of understanding and adhering to Incoterms in international trade.

Step-by-step explanation:

In this scenario, the final answer is affirmative—Taha Company bears the responsibility for the freight cost. The key determinant here is the specified shipping terms, denoted as FOB destination. In a transaction governed by FOB destination, the seller (Taha Company) retains ownership and liability for the goods until they reach the buyer's designated destination. Consequently, any associated costs, such as freight, are the seller's obligation. The incurred $200 freight in this case is thus Taha Company's responsibility.

The method of payment, in this instance, being cash, doesn't alter the fundamental terms of the agreement. Payment method typically pertains to the financial aspect of the transaction but doesn't impact the agreed-upon shipping terms. Consequently, even if the transaction was settled in cash, the responsibility for the freight cost would persist as dictated by the FOB destination terms.

Understanding and adhering to Incoterms, like FOB destination, is pivotal in international trade, delineating the rights and responsibilities of the buyer and seller. In this case, Taha Company's obligation to cover the freight cost is a direct consequence of the chosen Incoterm, illustrating the significance of clear and agreed-upon shipping terms in commercial transactions.

Answer 2

Taha Company is not normally responsible for freight costs under FOB destination terms; however, the inclusion of a $200 freight cost implies they may have paid for shipping, which would be recorded as part of the inventory's cost.

Step-by-step explanation:

When Taha Company purchased $8,000 of inventory with terms FOB destination, it implies that the seller is responsible for the freight and shipping costs until the goods reach Taha Company's destination.

Therefore, under normal circumstances, Taha would not be responsible for the freight cost.

However, the mention of Freight in amounted to $200 in the transaction implies that Taha Company may have agreed to cover the shipping cost separately.

In accounting terms, 'Freight in' refers to transportation cost associated with the delivery of goods from the vendor to the buyer's premises, considered an additional cost to the inventory.

If the transaction were paid for in cash, including the freight cost, this would typically be recorded as an increase in inventory value (debit) and a decrease in cash (credit).