Goods in Transit



[/Q/]
Q3. Goods in Transit
Based on the information below, which entity reports the goods in transit as its inventory?

[Information for Q3]
(1) Entity 3A sold 500 units of goods to Entity 3B, with the terms of Free on Board (F.O.B.) shipping point.
(2) All 500 units of goods were shipped on December 29, 20×1, and arrived at the destination on January 5, 20×2.

[/A/]
1. Because the goods were sold with terms of F.O.B. shipping point, legal title passed to Entity 3B on December 29, 20×1 when goods were shipped.

2. At December 31, 20×1, Entity 3B reports these goods as its inventory.

[Note]
1. Ownership of goods in transit is determined by the terms of shipping agreement.

2. Free on Board (F.O.B.) shipping point
Ownership of goods is transferred when the goods are on board at shipping point.

3. Free on Board (F.O.B.) destination
Ownership of goods is transferred when the goods arrive at destination.

[Exercise]
1. Entity 3C sold 600 units of goods to Entity 3D, with the terms of F.O.B. destination.

2. All 600 units of goods were shipped on December 30, 20×1, and arrived at the destination on January 6, 20×2.

3. Which entity should report the goods as its inventory at December 31, 20×1?

[Solution]
1. Because the goods were sold with terms of F.O.B. destination, legal title will pass to Entity 3D on January 6, 20×2 when goods arrive at destination.

2. At December 31, 20×1, Entity 3C reports these goods as its inventory.