Metro Hospital in Portland (buyer) entered into a contract to buy delicate lab equipment from Beta Company in Denver (seller). The contract states shipping terms as F.O.B., Denver. While in transit, the equipment was damaged beyond repair by the carrier, Fly-by-Nite Air Lines. The carrier is in weak financial condition and refused to pay for the equipment. What will happen?

Question

BlackTom AI · Accepted Answer

First, recall the key transport rule: under a contract with F.O.B. terms, the seller typically bears the risk of loss until the goods are delivered to the carrier at the named origin point. In this question, the contract specifies F.O.B., Denver, which means Beta Company (the seller) must deliver the goods to Fly-by-Nite Air Lines in Denver and the risk of loss generally passes to the buyer, Metro Hospital, once the goods are delivered to the carrier at the Denver point.

Option 1: 'Risk of loss will depend on which party chose Fly-by-Nite as the carrier.' Choosing a particular carrier does not alter the basic F.O.B. rule; the risk transfer occurs when the seller hands the goods to the carrier at the named location. Therefore this option misstates the governing rule.

Option 2: 'Metro Hospital has risk of loss.' This aligns with the F.O.B. Denver terms: once Beta Company delivered the goods to the Denver carrier, the risk shifted to Metro Hospital, so Metro bears the loss when the shipment is damaged in transit.

Option 3: 'Beta Company has risk of loss.' This would be true if the terms were something like FOB destination, where the seller retains risk through delivery to the buyer’s location. Here, the terms specify FOB Denver, so Beta does not retain risk after delivery to the carrier.

Option 4: 'Beta Company and Metro Hospital will share the loss equally.' There is no basis in F.O.B. Denver for automatic shared liability; the risk allocation is either with the buyer after delivery to the carrier or with the seller only if the carrier mishap occurred before delivery, neither of which yields a 50/50 split under standard terms.

In summary, the critical point is that F.O.B. Denver assigns risk of loss to Metro Hospital once Beta Company delivers the goods to the carrier in Denver, making option 2 the correct interpretation of the risk allocation in this scenario. The other options rely on misunderstandings of when risk transfers or on incorrect term interpretations.

ACCT:4300:0001 Fall25 Examination #1 - Accounting Ethics and Law- Requires Respondus LockDown Browser

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