Kew Co.'s accounts payable balance at December 31, year 2, was $2,200,000 before considering the following data:

 Kew Co.'s accounts payable balance at December 31, year 2, was $2,200,000 before considering the following data:

Goods shipped to Kew FOB shipping point on December 22, year 2, were lost in transit. The invoice cost of $40,000 was not recorded by Kew. On January 7, year 3, Kew filed a $40,000 claim against the common carrier.
On December 27, year 2, a vendor authorized Kew to return, for full credit, goods shipped and billed at $70,000 on December 3, year 2. The returned goods were shipped by Kew on December 28, year 2. A $70,000 credit memo was received and recorded by Kew on January 5, year 3.
Goods shipped to Kew FOB destination on December 20, year 2, were received on January 6, year 3. The invoice cost was $50,000.
What amount should Kew report as accounts payable in its December 31, year 2 balance sheet?

$2,170,000
$2,180,000
$2,230,000
$2,280,000

Answer

$2,170,000

 You Answered Correctly!
Before adjustment, the balance in the Accounts Payable account is $2,200,000. The $40,000 of goods lost in transit from a vendor were shipped FOB shipping point. This means the buyer owns the goods while they were in transit; therefore, Kew should record the purchase and accounts payable in year 2. Kew, not the vendor, is ultimately responsible for the lost goods (note that Kew, not the vendor, is suing the common carrier). The $70,000 return that was recorded on 1/5/Y3 should have been recorded in year 2 when the return was authorized (December 27, year 2). Therefore, Kew should reduce 12/31/Y2 Accounts Payable by $70,000. The $50,000 of goods received on 1/6/Y3 were properly recorded in year 3, since the terms were FOB destination (the buyer does not own the goods until they are physically received). Therefore, no adjustment is necessary for this amount. Kew should report 12/31/Y2 Accounts Payable at $2,170,000 ($2,200,000 + $40,000 − $70,000).