Question

6) If goods are sold on terms FOB destination point, the A) buyer normally pays the transportation costs B) seller normally pays the transportation costs C) buyer and the seller split the transportation costs D) shipping company bears the transportation cost

Answer 1

FOB destination is a contraction of the term "Free on Board Destination."

The key elements of all the variations on FOB destination are the physical location during transit at which title changes and who pays for the freight. If a buyer's transportation department is proactive, it may avoid FOB destination terms, instead favoring FOB shipping point terms so that it can better control the logistics process.Since the buyer takes ownership of the goods at its own receiving dock, that is also where the seller should record a sale.

The buyer should record an increase in its inventory at the same point (since the buyer is undertaking the risks and rewards of ownership, which occurs at the point of arrival at its shipping dock). Also, under FOB destination terms, the seller is responsible for the cost of shipping the product.

If the goods are damaged in transit, the seller should file a claim with the insurance carrier, since the seller has title to the goods during the period when the goods were damaged.

In reality, the shipper will probably record a sale as soon as merchandise leaves its shipping dock, irrespective of the terms of delivery. Thus, the real impact of FOB destination terms is the determination of who pays for the freight expense.

Thus the seller pays and bears the freight charges and owns the goods while they are in transit. Title passes at the buyer's location. FOB destination, freight prepaid and added. The seller pays the freight charges but bills them to the customer.

Example of FOB Shipping Point:

Assume that a seller quoted a price of $900 FOB shipping point and the seller loaded the goods onto a common carrier on December 30. Also assume that the goods are in transit until they arrive at the buyer's location on January 2. On December 30, the seller should record a sale, an account receivable, and a reduction in its inventory.

The buyer should record the purchase, the account payable, and the increase in its inventory as of December 30 (the date that the purchase took place). Since the goods on the truck belong to the buyer, the buyer should pay the shipping costs. These shipping costs will be an additional cost of the goods purchased.

Example of FOB Destination:

Now assume that a seller quoted $975 FOB destination and the seller loaded the goods onto a common carrier on December 30. Also assume that the goods are on the truck until January 2, when they are unloaded at the buyer's location. On December 31, the goods were owned by the seller. Therefore, the seller should continue to report these goods in its inventory until January 2. The seller will be responsible for the shipping costs, which will be an expense in January when the sale is reported.

The buyer records the purchase, accounts payable, and the increase in inventory on January 2 when the buyer becomes the owner of the goods.