Freight (page 254)

Who Shoulders the Transportation

Freight Terms Who Pays the Shipper?
Cost?
FOB Destination, Freight Prepaid Seller Seller
FOB Shipping Point, Freight Collect Buyer Buyer
FOB Destination, Freight Collect Seller Buyer
FOB Shipping Point, Freight Prepaid Buyer Seller

 FOB Shipping Point – ownership over the goods passes from the seller to the buyer when the inventory
leaves the seller’s place of business.
 FOB Destination – title passes only when the goods are received by the buyer at the point of destination.
 The shipping costs borne by the buyer using the periodic inventory systems are debited to transportation in
account.
 Shipping costs borne by the seller are debited to transportation out account.

TRANSPORTATION OUT
Case No. 1. Assume that T. Calaguas Traders sold merchandise totaling P17,000, FOB destination, freight prepaid;
terms 2/10, n/30. The transportation costs amounted to P1,900. The entry to record this transaction would be:
Nov. 25 Accounts Receivable 17,000
Transportation Out 1,900
Sales 17,000
Cash 1,900
Sales on account; terms 2/10, n/30; FOB destination, freight prepaid,
P1,900.

If this invoice is collected on Dec. 5, the sales discount will be P340 (P17,000 x 2%). Transportation out is an operating
expense.
Dec. 5 Cash 16,660
Sales Discounts 340
Accounts Receivable 17,000

Case No. 2. Assume that T. Calaguas Traders sold merchandise totaling P17,000, FOB shipping point, freight collect;
terms 2/10, n/30. The transportation costs amounted to P1,900. The entry to record this transaction would be:
Nov. 25 Accounts Receivable 17,000
Sales 17,000
Sold merchandise on account; terms 2/10, n/30; FOB shipping point,
freight collect.

There is no debit to transportation out account since the shipping term provided that the buyer should shoulder the
transportation costs. If this invoice is collected on Dec. 5, the sales discount will be P340 (P17,000 x 2%). The entry
would be:
Dec. 5 Cash 16,660
Sales Discounts 340
Accounts, Receivable 17,000

Case No. 3. Now, assume that T. Calaguas Traders sold merchandise totaling P17,000 FOB destination, freight collect;
terms 2/10, n/30, The transportation costs amounted to P1,900. The entry to record this transaction would be:
Nov. 25 Accounts Receivable 15,100
Transportation Out 1,900
Sales 17,000
Sales on account; terms 2/10, n/30; FOB destination, freight collect,
P1,900.

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Accounts receivable is decreased by the transportation charges paid by the buyer for the benefit of the seller. If this
invoice is collected on Dec. 5, the sales discount will be P340 (P17,000 × 2%) since the discount applies to total sales.
Dec. 5 Cash 14,760
Sales Discounts 340
Accounts, Receivable 15,100

Case No. 4. Assume further that T. Calaguas Traders sold merchandise totaling P17,000 FOB shipping point, freight
prepaid, terms 2/10, n/30. The transportation costs amounted to P1,900. The entry to record this transaction would be:
Nov. 25 Accounts Receivable 18,900
Sales 17,000
Cash 1,900
Sales on account; terms 2/10, n/30; FOB shipping point, freight
prepaid, P1,900.
If this invoice is collected on Dec. 5, the sales discount will be P340 (P77,000 x2%), The discount only applies to total
sales.
Dec. 5 Cash 18,560
Sales Discounts 340
Accounts, Receivable 18,900

Transportation In
Case No. 1. Assume that T. Calaguas Traders made purchases totaling P17,000 FOB destination, freight prepaid; terms
2/10, n/30. Transportation costs amounted to P1,900. The entry would be:
Nov. 25 Purchases 17,000
Accounts Payable 17,000
Purchased merchandise on account; terms 2/10, n/30; FOB
destination, freight prepaid.

There is no debit to transportation in account since the shipping term provided that the seller should shoulder the
transportation costs. In addition, the seller prepaid the freight. If this invoice is paid on Dec. 5, the purchases discount
will be P340 (P17,000 x 2%. The entry would be:
Dec. 5 Accounts Payable 17,000
Purchases Discounts 340
Cash 16,660
Case No. 2. Assume that T. Calaguas made purchases totaling P17,000 FOB shipping point, freight collect; terms 2/10,
n/30. The transportation costs amounted to P1,900. The entry to record this transaction would be:
Nov. 25 Purchases 17,000
Transportation In 1,900
Accounts Payable 17,000
Cash 1,900
Purchases on account; terms 2/10, n/30; FOB shipping point,
freight collect, P1,900.

If this invoice is paid on Dec. 5, the purchases discount will be P340 (P17,000 x 2%). Transportation in will form part
of the net cost of purchases.
Dec. 5 Accounts Payable 17,000
Purchases Discounts 340
Cash 16,660

Case No. 3. Now, assume that T. Calaguas Traders made purchases totaling P17,000 FOB destination, freight collect;
terms 2/10, n/30. The transportation costs amounted to P1,900. The entry to record this transaction would be:
Nov. 25 Purchases 17,000
Accounts Payable 15,100
Cash 1,900
Purchases on account; terms 2/10, n/30; FOB destination, freight
collect, P1,900

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Accounts payable is decreased by the transportation charges paid by the buyer for the benefit of the seller. If this
invoice is paid on Dec. 5, the purchases discount will be P340 (P17,000 x 2%) because the discount applies to total
purchases.
Dec. 5 Accounts Payable 15,100
Purchases Discounts 340
Cash 14,760

Case No. 4. Assume further that T. Calaguas Traders made purchases totaling P17,000 FOB shipping point, freight
prepaid; terms 2/10, n/30. The transportation costs amounted to P1,900. The entry to record this transaction would be:
Nov. 25 Purchases 17,000
Transportation In 1,900
Accounts Payable 18,900
Purchased merchandise on account; terms 2/10, n/30; freight
prepaid, P1,900.

If this invoice is paid on Dec. 5, the purchases discount will be P340 (P17,000 x 2%). The buyer is not entitled to
discounts on the transportation costs. Discounts apply only to total purchases.
Dec. 5 Accounts Payable 18,900
Purchases Discounts 340
Cash 18,560

Cost of Goods Sold / Cost of Sales

Theodore Calaguas Traders

Partial Income Statement
For the Year Ended Dec. 31, 2013

Merchandise Inventory, beginning P 528,000

Purchases P 1,264,000
Less: Purchase Returns and Allowances P 56,400
Purchase Discounts 21,360 77,760
Net Purchases P 1,186,240
Transportation In 82,360
Net cost of Purchases 1,268,600
Goods Available for Sale P 1,796,600
Less: Merchandise Inventory, ending 483,000
Cost of Sales / Cost of Goods Sold P 1,313,600

Merchandise Inventory at the end of the Period

At the end of the period, entries are made to reflect the inventory account the ending balance.
The Adjusting Entry Method
Dec. 31 Income Summary 528,000
Merchandise Inventory, beginning 528,000
To remove beginning balance of merchandise inventory and
transfer it to income summary

Dec. 31 Merchandise Inventory, end 483,000

Income Summary 483,000
To establish ending balance of merchandise inventory and
deduct it from goods available for sale in income summary.

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WORKSHEET
- Sales (Cr.), Sales Returns and Allowances (Dr.), and Sales Discount (Dr.) are can be seen in the income
Statement.
- Purchases (Dr.), Purchase Returns and Allowances (Cr.), Purchase Discounts (Cr.) are can be seen in the
income Statement.
- Transportation in (Dr.) is in the Income Statement.
- Transportation Out (Dr.) in the Income Statement.
- Merchandise Inventory:
o Beginning – Income Statement, Debit
o Ending – Income Statement, Credit and Balance Sheet, Debit

CLOSING ENTRIES
Date Account Titles and Explanation PR Debit Credit
2013
Dec. 31 Merchandise Inventory, End 483,000
Sales 2,463,500
Purchases Returns &Allowances 56,400
Purchases Discounts 21,360
Income Summary 3,024,260
To close temporary accounts with credit balances and
to establish the ending merchandise inventory.

31 Income Summary 2,569,050

Merchandise Inventory, Beg. 528,000
Sales Returns & Allowances 27,500
Sales Discounts 42,750
Purchases 1,264,000
Transportation in 82,360
Sales Salaries Expense 225,000
Office Salaries Expense 171,000
Store Supplies Expense 15,400
Office Supplies Expense 12,040
Insurance Expense-Selling 5,600
Insurance Expense-General 3,600
Transportation Out 57,400
Utilities Expense 48,000
Depreciation Expense-Store Eqpt. 26,000
Depreciation Expense-Office Eqpt. 22,000
Interest Expense 38,400
To close temporary accounts with debit balances
and to remove beginning inventory.
31 Income Summary 455,210
T. Calaguas, Capital 455,210
To close income summary account.

31 T. Calaguas, Capital 200,000

T. Calaguas, Withdrawals 200,000
To close the withdrawal account.

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