Question

Fy World sold $24,000 of merchandise to Chase Liquidators on December 23, terms FOB destination. This shipment is still in transit on 12/31, Wally's year-end.
Will Wally record revenue for this transaction on its 12/31 income statement?

A. Half of the performance obligations have been met, as the items have shipped, so Wally can realize half of the revenue related to this transaction, or $12,000.
B. Yes, Wally has satisfied the performance obligation and can record revenue of $24,000.
C. There is not enough information to determine the amount of revenue Wally should recognize.
D. No, no revenue is recorded for items shipped FOB destination until those items reach the buyer.

Answer 1

Answer:

No, no revenue is recorded for items shipped FOB destination until those items reach the buyer.

Explanation:

In this scenario the buyer has not received the good so ownership has not transferred hands. According to shipping FOB terms, till the buyer actually recieves the goods they are technically still the property of FY world.

So Wally will not be able to record revenue against this sale. Rather he will still recognise the merchandise as part of the companie's inventory.

When the buyer recieves the goods he can now record the revenue from the sale.

Answer 2

Answer:

D) No, no revenue is recorded for items shipped FOB destination until those items reach the buyer.

Explanation:

FOB shipping point transfers ownership of the goods only once they have been delivered, so until the goods reach the customer they still belong to Wally.

But that may change depending on the sales procedure that Wally follows. If Wally is exporting the goods they could recognize the sale immediately after they leave its shipping dock since all exports must be insured. So even though the title of the goods doesn't pass the payment is guaranteed and the earning process is competed. Generally letters of credit used in export transactions recognize the sale after the goods leave the suppliers warehouse. Anything that happens to the goods will be covered by the insurance policy.

Generally in the US most freight companies also require insurance for domestic deliveries, so the transaction will also be completed. But since we do not know where Wally operates, we must assume that they are not required to purchase insurance policies so Wally bears the risk.