Question

Smith Company purchased inventory for 5,000 on account. Freight cost was600 paid in cash. The freight terms were FOB destination. The inventory was sold to customers for 8,000. Freight cost was600 paid in cash. The freight terms were FOB shipping point. Based on this information, what would be the net income?

1) gross margin would be $2,400.
2) net income would be $3,000.
3) net income would be $1,800.
4) None of the answers are correct.

Answer 1

Smith Company's net income would be $2,400, which is calculated by subtracting the cost of goods sold ($5,000) and additional freight costs ($600) from the sales revenue ($8,000).

Step-by-step explanation:

To determine the net income for Smith Company, we need to calculate the total expenses and subtract them from the sales revenue. The initial inventory purchase was $5,000 on account, which is the cost of goods sold (COGS). Because the freight terms on this purchase were FOB destination, the seller, not Smith Company, is responsible for the $600 freight cost. Thus, it does not affect Smith Company's expenses.

When Smith Company sold the inventory to customers for $8,000, they incurred a freight cost of $600 with FOB shipping point terms, which means that the buyer is responsible for the delivery cost. Smith Company paid this cost, so it is an expense. Consequently, the gross margin is calculated as sales revenue minus COGS ($8,000 - $5,000 = $3,000). Deducting the additional freight cost expense of $600, the net income is $3,000 - $600 = $2,400.