The accountant for the Hilda Company recorded a purchase of merchandise on credit for the current year, but the merchandise was shipped FOB destination and did not arrive until after current year-end.Assuming a periodic inventory system, how would assets, liabilities, and retained earnings be affected on the year-end balance sheet? $\begin{array}{lll}&\text {Asssets }&\text { Liabilities}&\text { Retained Earming}\\hline
I.&\text { No effect } & \text { Understated } & \text { Understated } \
II.&\text { Understated } & \text { Understated } & \text { Understated } \
III.&\text { No effect } & \text { Overstated } & \text { Overstated } \
IV.&\text { No effect } & \text { Overstated } & \text { Understated }
\end{array}$

Question

The accountant for the Hilda Company recorded a purchase of merchandise on credit for the current year, but the merchandise was shipped FOB destination and did not arrive until after current year-end.Assuming a periodic inventory system, how would assets, liabilities, and retained earnings be affected on the year-end balance sheet? $\begin{array}{lll}&\text {Asssets }&\text { Liabilities}&\text { Retained Earming}\\hline
I.&\text { No effect } & \text { Understated } & \text { Understated } \
II.&\text { Understated } & \text { Understated } & \text { Understated } \
III.&\text { No effect } & \text { Overstated } & \text { Overstated } \
IV.&\text { No effect } & \text { Overstated } & \text { Understated } 
\end{array}$

Quizplus · Accepted Answer

Under FOB destination terms, the seller retains ownership until the goods are delivered. Therefore, the merchandise should not be included in the buyer's inventory until it arrives. Recording the purchase on credit before year-end overstates liabilities (as the payable is recorded without receiving the goods) but does not affect assets (since the inventory is not yet received and thus not recorded). Retained earnings are understated because expenses (cost of goods sold) are not recorded without the inventory, potentially overstating net income.

The Accountant for the Hilda Company Recorded a Purchase of Merchandise