Does your client have a liability that should be recorded at December 31? Discuss.

Yes, my client has a liability that should be recorded at December 31. The client incurred an expense of $1,500 on the shipping cost, and the amount should be paid in 30 days. According to the F.O.B shipping point agreement, the buyer is responsible for the transportation cost (Kieso, Weygandt, & Warfield, 2011). Besides, it means that a transaction took place, and the ownership of the goods was transferred at the shipping point. The client became the owner on December 24, and he has to record the goods as inventory as of December 31. Similarly, the client should record the goods as a liability under accounts payable amounting to $35,300.

For what possible reason(s) might your client wish to postpone recording the transaction?

The client does not have any good reasons; however, he/she might have wished to understate the total liabilities. The company’s inventory turnover reduces when the total average inventory increase. Similarly, it was possible that the client might have wished to delay the recognition of expenses and to show a massive investment in inventory.

Reference

Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2011). Intermediate accounting: Vol. 1. Hoboken, NJ: John Wiley & Sons.

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