Question

At December 31, 2017 Mohling Company’s inventory records indicated a balance of $632,000. Upon further investigation it was determined that this amount included the following:

$112,000 in inventory purchases made by Mohling shipped from the seller 12/27/17 terms FOB destination, but not due to be received until January 2nd

$74,000 in goods sold by Mohling with terms FOB destination on December 27th. The goods are not expected to reach their destination until January 6th.

$6,000 of goods received on consignment from Dollywood Company

I know that the correct ending inventory would be $514,000. However, why would we not deduct the $74,000 in goods sold by Mohling with terms FOB destination? I thought that the inventory only transfers ownership once the goods arrive at the destination.

Answer 1

$74,000 goods are sold by Mohling with terms FOB DESTINATION. FOB DESTINATION means the goods will be recorded as sale only when the goods reach the purchasers place ie.Destination. Until the goods reach the purchasers place ie. Destination, the goods should be recorded in Mohling’s inventory.

In simple terms, goods should be reduced from inventory only when they reach the destination when sold under the terms FOB DESTINATION.

In the current scenario the good are sold 27th December, but the good will not reach the destination before 6th January. Units the goods reach the destination, Mohling will recorded the goods in its inventory. Once the goods reach the destination after 6th January, Mohling will reduce the inventory with $74,000.