Question

Armadillo Inc. sold merchandise to Falls Corp. on Dec. 30, 2014, with shipping terms of FOB shipping point. Falls Corp received the merchandise on Jan. 4, 2015. Which one of the following statements is true?

1) Armadillo should pay the transportation costs and include the merchandise in its year-end inventory
2) Falls Corp. should pay one-half of the transportation costs
3) Falls Corp. should include the merchandise in its inventory at Dec. 31, 2014
4) Armadillo and Falls each include half of the inventory value on their respective balance sheets

Answer 1

The correct answer is option 3) Falls Corp. should include the merchandise in its inventory at Dec. 31, 2014.

Step-by-step explanation:

FOB shipping point means that ownership of the merchandise and the responsibility for the shipping costs transfers to the buyer as soon as the goods are shipped.

In this case, Armadillo Inc. sold merchandise to Falls Corp. with FOB shipping point terms, which means that Falls Corp. is responsible for the transportation costs.

The correct statement is that Falls Corp. should include the merchandise in its inventory at Dec. 31, 2014. This is because the ownership and risk of loss for the merchandise transferred to Falls Corp. on Dec. 30, 2014, when the goods were shipped.