Final answer:
The cost of merchandise sold increases when merchandise is sold on account with FOB Destination as more inventory is sold and COGS is recognized. The overall merchandise balance can be affected by other transactions in the given period.
Step-by-step explanation:
When merchandise is sold on account with Free On Board Destination (FOB Destination), the cost associated with the merchandise sold is the cost to the seller until the merchandise reaches the buyer's location. As such, the selling firm recognizes the cost of goods sold at the time of sale. Until the goods reach the destination, they are part of the seller's inventory.
The action of selling merchandise on account means that the revenue is recognized, and a receivable is recorded. At the same time, an equivalent amount of inventory is decreased, and the cost of that merchandise (cost of goods sold or COGS) is recognized in the income statement. Therefore, the cost of merchandise sold increases because more inventory has been sold.
However, without additional context or figures, we cannot precisely determine the effect on the overall balance of merchandise. Other factors such as new purchases, returns, or additional sales during that accounting period can alter the ending merchandise balance and the overall accounting equation.