Determine the accounting treatment for each of the following: Goods shipped from

Question

Determine the accounting treatment for each of the following:

Goods shipped from Company A to Company B on terms of FOB shipping point are still in transit on December 31.

Same information as A except the goods are shipped FOB destination.

Goods in the hands of the consignees.

Freight charges on merchandise purchases

Interest charges on loans to purchase merchandise.

For each of the above situations, choose one of the following options:

Included in the inventory of Company A

Included In the inventory of Company B

Neither 1 nor 2.

If your response is #3, explain how item(s) would be accounted for.

2. Indicate what effect each of the following errors will have on cost of goods sold.

Overstatement of ending inventory

Understatement of beginning inventory

Understatement of purchases

Overstatement of purchases and ending inventory

For each of the above situations, choose one of the following options:

Understate

Overstate

No effect

Explanation / Answer

1. Goods shipped by Company A to Company B : FOB shipping point

To be included in the inventory of Company B.

Freight charges from shipping point to be borne by Company B.

Goods shipped by Company A to Company B: FOB Destination

To be included in the inventory of Company A.

Freight charges to be borne by Company A till destination.

Interest charges on loan to purchase merchandise, to be borne by the company taking the loan.

2.

Error Effect on Cost of Goods Sold Overstatement of Ending Inventory Understated Understatement of Beginning inventory Understated Understatement of purchases Understated Overstatement of purchases and ending inventory Overstated, Understated

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