ABC Ltd. is a mail order clothing retailer. All items are shipped to customers FOB shipping pointandmust be prepaid by thecustomer before anyitems are shipped.At what point should ABC recognize revenue?

a) At the time of shipping
b) When the goods reach the customer
c) When payment is received
d) When the goods are placed into the inventory


I am having a hard time deciding which one it is... Shipping point means Ownership transfer when Customer received the merchandise.

However, the question is asking when to recognize revenue, so I would assume C) when payment is received because you have the journal entry of Dr. Unearned Revenue Cr. Service Revenue... but the answer can also be b) when goods reach the customer because it is FOB shipping. I



Can someone help me out?

First, go back and re-check your understanding of "FOB Shipping Point" (vs. FOB Destination).

You're on track thinking that revenue should be recognized when ownership of the goods is deemed to transfer. Now, when is the ownership considered transferred, under FOB Shipping Point?

[B] C) when payment is received because you have the journal entry of Dr. Unearned Revenue Cr. Service Revenue....

Never use payment receipt as your judge of when to recognize revenue. The payment may or may not happen at the time revenue is earned.

Interestingly, you've said this wrong, but you're actually on to something. The journal entry is not for when payment is received. That journal entry is for when you would recognize the revenue. (You're credited revenue, so you're recognizing it.) But think about why you would have had something in the Unearned Revenue account to begin with.

Ok so I reviewed FOB and it must be a) right?

a) At the time of shipping

FOB shipping point means the title to the goods passes from seller to buyer when the goods are shipped. So that's when you can recognise the sale.

What do you think?

Sounds like a winner.