On March 15, 2016, New Age Company enters into a contract to build custom machin

Question

On March 15, 2016, New Age Company enters into a contract to build custom machinery for Michaels Company. The contract specified a delivery date of May 1. The machinery was shipped on May 15 but not delivered until May 31. The price of machinery is $125,000. How much and when should revenue from this contract be recorded?

1.    The contract terms are Net30 FOB destination.

2.    The contract terms are Net30 FOB shipping point.

Which terms would you prefer as a seller? Buyer? Please explain your answer.

Explanation / Answer

Solution 1:

Revenue shall be recognized on May 31 for $125,000 when goods were delivered to buyer as contract terms is FOB Destination.

Solution 2:

Revenue shall be recognized on May 15 for $125,000 when goods were shipped to buyer as contract terms is FOB shipping point.

As a seller we will prefer contract terms as FOB Shipping point as ownership transferred to the buyer when same were shipped by the seller. As a buyer, i will prefer contract terms as FOB destination because transit risk lies with the seller.

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