How Should Acme, Inc. Record the Purchase Transaction?

Question:

Acme, Inc. ordered merchandise from Zenith Company on November 27. When should Acme record the purchase?

a. November 27

b. November 29

c. December 1

d. January 2

Final answer:

Acme, Inc. should record the purchase on December 1, when the merchandise arrives at their location due to the Free On Board (FOB) destination agreement. The correct option is: c. December 1.

Answer:

The correct answer is c. December 1. In this case, Acme, Inc. should record the purchase when it received the merchandise. This is due to their agreement being FOB (Free On Board) destination. The FOB destination term means that ownership officially transfers when the goods arrive at the buyer's location. Since the merchandise arrived at Acme's warehouse on December 1, that's when Acme should record the purchase. Despite the payment date being on January 2, this does not impact when the transaction should be recorded for accounting purposes.

When a company such as Acme, Inc. places an order for merchandise with a supplier like Zenith Company, the timing of recording the purchase transaction is crucial for accurate financial reporting. In this scenario, the FOB destination shipping terms play a significant role in determining when Acme should record the purchase.

FOB destination means that the supplier (Zenith Company) retains ownership of the goods until they reach the buyer (Acme) at the designated destination, in this case, Acme's warehouse. As a result, Acme should record the purchase on December 1 when the merchandise physically arrived at their warehouse.

It's important for companies to adhere to accounting principles and recognize transactions like these accurately to reflect the true financial position of the business. By understanding the FOB terms and when ownership transfers, companies like Acme can ensure their financial statements are reliable and compliant with accounting standards.

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