How to deal with FOB Shipping Point Freight Prepaid?
A business sells goods to a buyer with the terms FOB shipping point freight prepaid. The value of the goods is 5,000 and the settlement terms are 2/10, n/30. The freight cost from the shipping point to the buyers destination is 700. The seller prepays the freight expense.
Calculate the following:
- The value of the sale
- The amount debited to accounts receivable
- The discount for early settlement
- The amount due within the settlement discount period
As the terms are FOB shipping point prepaid freight, the buyer is responsible for the freight charges as shown in the diagram below.
- The value of the sale is 5,000.
- Although it is the responsibility of the buyer, the seller has prepaid the freight expense and needs to recover this. The amount recoverable (accounts receivable) from the buyer is the value of the goods 5,000 and the freight charge 700 = 5,700.
- The discount for early settlement is based only on the value of the goods and does not include the recoverable freight expense. Discount = 5,000 x 2% = 100.
- The amount due from the buyer allowing for the discount is given as follows: Amount due = Value of goods – Settlement discount + Freight expense recoverable = 5,000 – 100 + 700 = 5,600
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.