[Anonymous]

I have a question about the journal entry and the carrying value that should be recorded for equipment under these circumstances:

-The company received an invoice for equipment totaling $100,000

-$5000 of the invoice was for taxes

-$200 of the invoice was for shipping

-Shipping is FOB Destination (which means shipping costs are not ultimately the buyer’s responsibility, right?)

Is the journal entry to record this transaction:

D:Equipment 99,800

D:Reimbursement receivable 200

C: Accounts Payable 100,000

My question really revolves around the shipping expense and whether the company should capitalize it/record it in accounts payable.

EDIT: My question also assumes the taxes are capitalized to the equipment account, is this correct?

[greg2015]

FOB destination means that the title passes from the sender to the receiver once it reaches its destination; it doesn't dictate who pays the shipping cost. Additional terms in the contract would address who pays shipping. In this case, since the company is being billed for the shipping, I think we can assume that it is responsible for the cost. Therefore, the entire $100,000 would be capitalized as a fixed asset because you would need to include all costs associated with getting the asset ready to use (taxes, shipping). Because it's FOB destination, the company would not record an entry until the equipment arrives and title has passed to the company. The entry would debit $100,000 to fixed assets and credit A/P for $100,000.

AUD: 99
FAR: 95
BEC: 89
REG: 87

AICPA Ethics: 91

Licensed Illinois CPA

[Anonymous]

Thank you for your reply.

When I search FOB Destination, I get this definition:

“Terms indicating that the seller will incur the delivery expense to get the goods to the destination. With terms of FOB destination the title to the goods usually passes from the seller to the buyer at the destination. This means that goods in transit should be reported as inventory by the seller, since technically the sale does not occur until the goods reach the destination.”

Am I simply misunderstanding something?

[greg2015]

The seller most likely did arrange to ship the item and incurred costs with the shipping company. However, because the seller billed the customer for the shipping cost on the invoice, presumably there was an understanding between the parties that the customer would be responsible for this cost. It wouldn't make sense for the seller to bill the customer for shipping charges only then to have the customer come back and request reimbursement for them. Who is ultimately responsible for the shipping cost is usually a negotiated term, just like when you buy something online, sometimes you will have to reimburse the seller for it or other times they will ship it free.

AUD: 99
FAR: 95
BEC: 89
REG: 87

AICPA Ethics: 91

Licensed Illinois CPA

[Anonymous]

That makes sense…unfortunately.

[Author]

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