How to Record Revenue for Merchandise Sold FOB Destination
Will Wally record revenue for this transaction on its 12/31 income statement?
A. Half of the performance obligations have been met, as the items have shipped, so Wally can realize half of the revenue related to this transaction, or $12,000.
B. Yes, Wally has satisfied the performance obligation and can record revenue of $24,000.
C. There is not enough information to determine the amount of revenue Wally should recognize.
D. No, no revenue is recorded for items shipped FOB destination until those items reach the buyer.
Answer:
The correct answer is D. No, no revenue is recorded for items shipped FOB destination until those items reach the buyer.
When merchandise is sold FOB destination, revenue is not recorded until the items reach the buyer. This is because the ownership of the products does not change until they arrive at their destination as per the shipping term FOB destination.
As per the given case, since the shipment is still in transit on Wally's year-end, no revenue should be recorded for this transaction on the December 31st income statement.
It is important for businesses to follow the correct accounting principles and recognize revenue only when the performance obligations have been met, which in this case is when the items reach the buyer.
Therefore, Wally should wait until the merchandise reaches Chase Liquidators before recording any revenue associated with this transaction.
Understanding the proper timing of revenue recognition is crucial for accurate financial reporting and compliance with accounting standards.