Neither party records the transaction until that time. However, if the contract states that the transaction is made “ FOB destination,” the seller maintains legal ownership until the bicycle arrives at the store on January 4, Year Two. Consequently, both the asset and the liability appear on the December 31, Year One, balance sheet prepared by the buyer while Builder records sale revenue in Year One. agrees to this condition, the transaction occurs on December 29, Year One, when the bicycle leaves the seller. In this illustration, if Builder Company specifies that the sale of this bicycle is made “ FOB shipping point” and Rider Inc. It signifies the appropriate date for recording. That is the moment that the bicycle is assumed to be conveyed from one party to the other. FOB stands for “Free On Board” (a traditional maritime term that has gained a wider use over the years) and indicates when legal title to property is transferred. When Rider produces its financial statements for Year One, should the inventory cost and related payable be included even though the bicycle was not physically received until Year Two?Īnswer: Documents prepared in connection with shipments made from a seller to a buyer are normally marked with an “FOB” point. It is shipped by Builder Company from Wisconsin on December 29 of Year One and arrives at the retail store on January 4 of Year Two. To illustrate, assume this bicycle is ordered by Rider Inc. The precise moment for recording the transaction is probably not critical except near the end of the year when the timing of journal entries can impact the balances to be included on the financial statements. Delivery takes several days at a minimum. When should an inventory purchase be recorded? Assume, for example, that Builder Company (the manufacturer of this bicycle) is located in Wisconsin, whereas the retail store operated by Rider is in Kentucky. (the sporting goods company) buys a bicycle for resell purposes and records the transaction using either a perpetual or periodic system. Understand the necessity of taking a physical inventory count. Provide the computation used in a periodic inventory system to derive cost of goods sold along with the adjusting entry necessary to enter the appropriate balances into the accounting system for each period.Identify the time at which cost of goods sold is computed in a periodic inventory system as well as the recording made at the time of sale.Identify the time at which cost of goods sold is computed in a perpetual inventory system as well as the recording made at the time of sale.
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