Q5-11RQ - Horngren'S Financial And Managerial Accounting

Question

Describe FOB shipping point and FOB destination. When does the buyer take ownership of the goods, and who typically pays the freight?

Step-by-Step Solution

Answer

FOB shipping point indicates the risk linked with the buyer, and FOB destination represents the risk associated with the seller of the goods. 

Meaning of Freight

In accounting, the term “freight” denotes the cost associated with the goods or materials delivered to a customer for manufacturing or resale purposes. Freights are of two types: freight-in and freight-out. 

Description of FOB shipping point and FOB destination

The term “FOB shipping point” refers to the process used to define the risk associated with the buyer because once the seller ships the goods, the buyer is responsible for any damages to the goods in transit. At the same time, FOB destination means that the seller is responsible for all the risks until the buyer receives the goods. 

The buyer takes ownership of the goods at the FOB shipping point when the seller ships the goods, and the buyer pays for them. On the other hand, freight and other charges are borne by the seller until the goods are delivered.