Business Accounting (Merchandising)

Question

Firas sold merchandise on account to Fatin, RM15,000, terms FOB shipping point, n/45. The cost of the goods sold was RM9,000. Firas paid the RM1,000 shipping costs. In Fatin’s journal entry, what should be recorded? 

 

   ​​​​​  RM                    ​​RM 

A. Account Receivable ​​16,000 ​​Sales 16,000 

B. Cost of Goods Sold ​​16,000     ​Inventory 15,000 

C. Inventory ​​​16,000 ​Account Payable 16,000 

D. Inventory ​​​15,000  ​Account Payable 15,000 

 

Answer 1

Nuraisya, I always recommend my regular students to read the last sentence of a multiple choice as their first action step. Often multiple choice’s descriptive paragraphs contain too much unrelated, even unrequired information. Take this question as an example. It is about Fatin, not Firas. Our initial thought after reading the last sentence tells us: everything about Firas maybe unrequired.

Also, if you decided to condense the MC’s provided data, and the names or events are similarly named (like this one!), then use abbreviations which make sense. When reviewing this question, it becomes clear the inquirer wants to create some confusion between the buyer (Fatin) and the seller (Firas). To avoid confusion, relabel actions attributable to each party by the abbreviations F1 for the first appearance of the “F” surname or Firas as F1; subsequently, label Fatin as F2. 

Below I have abbreviated all the pertinent notes – which is NOT necessary after you have read the actual question (the last sentence!)

F1 sold F2 merchandise at 15K, terms n/45. Cost was 9K, F1 paid freight 1k. What is F2’s JE? 

The question simply asks – what is the purchaser’s JE for inventory acquisition? The question is simpler than the sum of all the given facts.

Let’s go through each MC answer and eliminate the incorrect answers by way of accounting knowledge.

First, the JE is from the standpoint of the seller, thus it is not a correct alternative for the solution. Also, the JE is incorrect from the standpoint of creating a receivable for 16K. The merchandise was sold for 15K and the 1k freight cost must be absorbed and expensed by the seller. Freight in this question has no effect on the buyer since the shipping terms are FOB shipping point.

Second, again the JE is from the seller’s view – therefore automatically incorrect. While the COGS is present correctly, the JE itself is out of balance.

Next, for the third time the JE is from the seller’s view. Also, the inventory wouldn’t have been debited for 16K to represent freight costs in the current period. Freight paid for shipping to the buyer is a period expense and not capitalized. Freight paid to acquire inventory is capitalized for the buyer – but that isn’t the case here. Also, incorrect JE amounts regardless of it being also from the seller’s view.

So far, each provided answer has been incorrect at two levels – all from the seller’s books and all have incorrect accounting theory application.

The answer is D – debit inventory and credit payables.

Nuraisya, I would welcome you as a regular protégée (student!), one I could mentor in accounting. As you might be able to tell – I love explaining accounting theory. My profile also shares that if you would prefer, I share my Excel screen, so you can ‘see’ how I think as I explain any homework assignment. At the end of our session, I email you the Excel file for your review. 

Best of luck going forward and (hopefully) looking forward to mentoring you!