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Goods are sold FOB shipping point and, as a courtesy, the seller prepays $20 of freight on account and adds it to the buyer's invoice. The goods sell for $500. What is the seller's combined entry for the sale plus prepaid freight?
ADebit Accounts Receivable $520; credit Sales $500; credit Accounts Payable $20
BDebit Accounts Receivable $520; credit Sales $520
CDebit Accounts Receivable $500; credit Sales $500; debit Delivery Expense $20; credit Accounts Payable $20
DDebit Accounts Receivable $500; credit Sales $480; credit Accounts Payable $20
Answer & Solution
Correct answer: A. Debit Accounts Receivable $520; credit Sales $500; credit Accounts Payable $20
1. The buyer owes the $500 product price plus reimbursement of $20 freight, so Accounts Receivable is debited $520.
2. Only the $500 product price is revenue, so Sales is credited $500.
3. The $20 freight prepaid on account is owed to the carrier, so Accounts Payable is credited $20; freight is not part of Sales.
4. Option B wrongly inflates Sales to $520; option C uses Delivery Expense (FOB destination); option D understates Sales.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §3.4 "Transportation Costs", p.102_