[Anonymous]

“Pulse Corp. maintained a warehouse where it stored its manufactured goods. Pulse received an order from Star. Shortly after Pulse identified the goods to be shipped to Star, but before moving them to the loading dock, a fire destroyed the warehouse and its contents. With respect to the goods, which of the following statements is correct?

A.
Pulse has title but no insurable interest.

B.
Star has title and an insurable interest.

C.
Pulse has title and an insurable interest.

D.
Star has title but no insurable interest.

The correct answer is C.
Title passes from the seller to the buyer only if the goods are identified in the sales contract. A buyer has an insurable interest from the time the goods are identified in the contract.”

The question clearly states the goods were “identified” by Pulse and the answer explanation states “title passes once goods are identified”. So why is title and insurable interest still with Pulse if the goods have been identified? According to this, title and insurance interest should have passed to Star, the buyer.

Yet, the correct answer is C…

[Missy]

Both the buyer and the seller have an insurable interest. The seller keeps it until title changes, the buyer has it from the point at which the goods are identified so from the time the goods are identified in a contract until title changes both have an insurable interest.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Anonymous]

So according to the question, the seller identified the goods, so title should have passed to the buyer.

Unless the definition of “identification” means identifying the goods AND moving them to the loading dock in order for title to pass, then I can understand. But I have not read that anywhere (only except that it applies to fungible goods), nor does the explanation provide any details on that.

The question says seller, Pulse, identified the goods, so why doesn't the title pass to the buyer, Star, at that point?

[Missy]

Title doesn't change WHEN the goods are identified in a contract, but identification is a prerequesite to the fact that title WILL change if the FOB terms are shipping point title changes the second the goods leave the loading dock at the shipper, if FOB destination title changes hands when the goods arrive at the purchaser. The fact the goods were not as far as the loading dock means neither situation had occured and title remains with the seller.

It's the part of the question that says the seller hadn't moved the goods to the loading dock yet that assures you title hadn't passed hands.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Anonymous]

Ok so “identified” means the goods have to have been identified AND segregated from the rest of the inventory in order for title to pass, but nowhere in the study material does it say that (only in regards to fungible goods).

[Anonymous]

Or perhaps the review material and explanation should indicate that title will pass when the BUYER identifies the goods (upon delivery for example), not the seller identifying the goods in the warehouse. Very confusing partial explanation for a question that requires attention to detail.

[Missy]

I'll walk through a real world example if you'd like.

I build cars, you make the seats. I ordered 1,000 tan leather seats from you and specified a part number. I've identified what I'm purchasing from you. Because my sales depend on receiving those seats I can insure them while they still belong to you. If you have a fire, your insurance will cover replacing those seats but my insurance will cover my lost business because I can't ship my cars on time. Title hasn't changed hands though.

Once the fob terms are met, say it's fob shipping point and the seats have left your loading dock but the ups truck catches fire it's nothing to you at all because my insurance will both replace the seats and my lost business.

The point of identifying the goods is twofold. For one if the only seats lost in the fire were black leather seats they weren't what our contract said so I couldn't insure them. Also if you shipped me the black leather seats and they were lost or damaged they're still yours to file an insurance claim on and you still own them.

The question might be with the wrong chapter in your material if you're not through all if it but I do know my reg material covered fob terms and title pretty heavily.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Anonymous]

Ok but still the question, answer, and explanation is inconsistent.

That's what I'm pointing out.

If the title doesn't pass when the goods are identified, then why does the explanation say it does? Also there is no mention of shipping terms.

[Missy]

The explanation is lacking severely I'll give you that. But what's given as the correct answer is correct.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Author]

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