Consignment The term consignment means transfer of goods from the owner, called the consignor, to ‘another person who acts as his agent, called the consignee. Title to the goods remains with the consignor up to the time the goods are sold by the consignee to a third party. The consignee is responsible to the consignor for the goods placed in his custody until they are sold or returned. Since the consignee does not acquire title to the goods, he does not include them in his inventory and he does not record any accounts payable or other liabilities. —— ne ee in a reasonable manner and to account for them to the consignor. When the goods are sold by the consignee, the resulting cash or accounts receiva- ble are assets of the consignor, At this point, the consignor recognizes a profit or a loss. ihe Gus diel bioeess usd Glbuioes ic feablic i tho puage of wb, In a transaction of sale, legal title passes to the buyer with the delivery of goods tothe buyer, Al- though there is also @-change in the custody of goods in a consignment transaction, legal title continues to remain with the consignor until the goods are sold by the consignee to a third party. Thus, in @ consignment transaction, legal title passes from the consignor to the ultimate transferee, the buyer, only when the sale is completed.Rights and Responsibilities of the Consignee s ae ‘When the goods are shipped on consignment, a written contract executed by the consig- nor and the consignee is necessary to provide specific rules on matters regarding commis allowable to the consignee,.credit terms to be granted to customers by the consignee, expenses: of the consignee to be reimbursed by the consignor, frequency of remittance to the consignor, care and protection of the consigned goods. The general rights and responsibilities of the con- signee are summarized as follows: ; Rights of the Consignee a. To receive compensation for selling the consigned goods. The commission (or other forms of payments) that is allowed to the consignee is normally a negotiated value between the parties. b. To receive reimbursement for necessary expenses incurred in connection with the consignment. Reimbursement for necessary expenses often covers such expenditures as freight, insurance and the usual warranty costs. c. To make the usual and not the extraordinary warranties with respect to the quality of the merchandise. The consignor is bound by the latter warranties. 4, To extend credit on the sale of the consigned merchandise, if the consignor has allowed him to do so, ? Responsibilities of the Consignee ‘a. To care for and protect the goods held on consignment ‘in a responsible manner. b. To use care in extending credit on the sale of the consigned goods and to sell the goods at prices specified by the consignor; in the absence of specification, at a price that appears to represent the best interest of the consignor. Similarly, the consignee should be diligent in collecting receivables. c, To keep the consigned goods separate from his own inventory in order to assure their easy identification. d. To render periodic reports of sales and to make liquidating settlements with respect to consignment transactions as specified in the consignment contract. ‘The Account Sales ‘The report submitted by the consignee usually upon his remittance to the consignor is called an account sales. It shows the goods received, goods sold, expenses incurred, advances made, and amounts owed or remitted. Remittance may be scheduled as agreed portions of the shipment sold or may not be required until all the consigned goods have either been sold or returned to the consignor. ‘lustration, Assume that Libra Company ships on consignment to Taurus & Company ten car stereo sets to be sold at 3,200 each. The consignee is to be reimbursed for transporta- tion costs of P1,000 and is to receive a commission of 20% of the authorized selling price. After selling all the consigned goods, Taurus & Company sends the consignor an account sales (Ilus- tration 8-1) accompanied by a check for the amount due.‘The accounting procedures to be followed by the onelgnes depend upon whether Ue aes eae sare recorded separately, or @ Renna Tamsin are not re corded separately. E Reimbursable expensed big conse, 2. -Advanogs to Commissions er Cpadginan Eee count sales which is simply-a classified signed goods. Wey ona cd wh el naa it is appropriate that an. account sales be submitted 0 ment I_* signee, and the ledger accounts are as shown in Illustration 8-3, Cost of Goods Sold (under perpetual inventory seeaiee tet periodic inventory system) and crediting the Consignot’s account for the it payable to the consignor (sales price minus commission). Expenses chargeable to consignot are recorded by a debit to Consig- nor’s account and a credit to Cash or to an expense account, if the expenses were previously — paid and recorded to an expense account. No journal entry is made for the commissions be-— cause the profit is measured by the difference between the amount credited to Sales and the amount debited to Cost of Goods Sold (or Purchases). The Consignor’s account is closed by a debit upon remittance to the consignor, é ‘Dustrative Entries ‘The journal entries that are required on the books of the consignee using the two methods are illustrated based on the following data: a ‘ On April 1, 19x5 Soni Company ships on consignment to Beta Company ten color tele- vision sets to be sold at P9,000 each, The consignee is required to advance 10% of the total selling price. Beta Company is to be reimbursed for transportation costs of ®2,250 and is to receive a commission of 20% of the authorized selling price. After solling all the consigned goods, Beta Company sends the consignor an account sales (Illustration 8-2) accompanied by a check for the amount due. ; : Applying the two methods, the journal entries in the books of Beta Company, the con-Mustration 8-3 Beta Company (Consignee) ‘Journal Entries and Ledger Accounts of Consignment Transactions | Consignment Transactions Recorded Separately Consignment Transactions Not Recorded Separately Received 10 TV sets from Soni Company to Received 10 TY sets from Soni Company to be soldat F9,000 each for a commission of 20% be sold at P9,000 each for a commission of 20%, of selling price, of selling price. & ail 2,250 Soni Company 2,250 : : 2,250 Cash. 2,250 | 3. To record advances to consignor, 9000 ‘Soni Company 9,900 = F30;00 ores 00, 9000 Cash » 9,000 . 90,000 : “99,000 aes 90,000 : ‘Cost of Sales (or Purchases). . 72,000 inet! eae > Soni Company’. poo # 000 072,000, ’ pS $. Commission on sles, 20% x 90,000 or Consignment In ~ Soni Co. "760,750. ‘Commission Income , | + 60,750 6 Remittance im settement of account, Consienment in — Soni Co. 60,750, : Cash 7. Summary of ledger accounts, 60,750 :‘Most companies use a separate Consignment In account for each shipment of merchan-. dise received on consignment. Hence, a general ledger controlling account representing ali Con signment In accounts and’a supporting pubaidiary pies ‘of indaduat coe In account are usually kept. * |At the end of the accotnting period when financial a eine: the Conor ment In‘aceounts or Consignor’s accounts will either have debit or credit balances. A debit bal- ance represents a receivable from the consignor and should be reptrted in the balance sheet as a current asset, A credit balance represents 2 payable to the consignor and should be classified. as 2 liability. However, Gonsignment In account balances which relate to various consignors should be shown separately. In-the income statement, the Commission Income account should Pepeetentied 9h at esi oF. ope anmcgnenIN ¢ ACCOUNTING PROCEDURES FOR eo ‘The oe bese to te followed by the ene” depend upon the method used as discussed bel: Consignment Profit Determined Separately. Under this-method, consignnient sales are recorded separately from regular sales, To accomplish this, a special account called Consigne ment Out is used to record consignment tr Consignment Out is debleed fot the followings 1. Cost of goods shipped on consignment. 2... Expenses related (o consignment inourred by the consignor. 3. Expenses related to consignment charged by the consignee, These ere reimbursable expenses paid by the consignee. 4, Consignment profit, Consignment Out is credited for the following: » 1. Sale of consigned goods reported by the consignee. % Goa of pocketed bribe consis 3, Consignment loss. At.the end of the accounting period, Consignment sis adjusied to 2 balance epresent- ee ing the sum of the cost of the unsold consigned goods and the relevant déferred expenses. These. expenses, known as Deferred Consignment Costs, are incurred to place the goods in position for - sale, These include all expenditures charged by the consignor and the consignee allocable to the unsold units such as freight charges and shipping insurance. Direct selling expenses such as ad " vertising and commission expenses are not included. (Deferred consignment costs are discussed further later in this chapter.) The adjustment to yield the correct end-of-period inventory ac- count balance may be a debit or a credit to the Consignment Out account. A debit adjustment epresents profit on consignment sales. Converscly, a credit adjustment represents a loss.Particular consignee: require separate accounts... 2 3 ‘The Consignment Out accout is not the reciprocal of the Consignment In account used by the consignee, as previously discussed, Consignmien’ Out has.a normat debit. balance: but it ‘shold fot be mistaken as accounts receivable. It represents special caistory of inventory, ‘itis presented as a current asset in tlis balance sheet. Be pald to consignee and freight similar accounts for regular sales. Mlustrative Entries (Completed Consignment) ‘The entries required on the books of the consighor using the two inethods of recording — consignment transsetions are illustrated based on the following data: =. x5, Nation Company ships ten Betamax sete t6 R. Solis. Each set costs a ised price OF P7009. The consignor pays freigitt costs of the selling price. He is allowed a 20% commission and is On May 30, Solis sends eash to tite consignor in settle ‘ment of his account together with the account sales shown below. =e a aosounts under the two methods is used) and in [Mustration 8-6 (theMlustration 8-5 Nation Company (Consignor) Journal Entries and Ledger Accounts for a Completed Consignient (Perpetual Inventory System) ‘Explanation ‘Consignment Profit Determined Separately ‘Consignment Profit Not Determined Separately 1, To record shipment of merchandise on ‘consignment costing 50,000. 2. To record payment of freight cost of F500. i 3. 1 ek coe eens rare ‘nee, 10% x 70,000 or P7,000. 4. To record remittance from consignee and the details of consignment transactions reported in the account sales. 6. Bie opie Svekeet ots cars ¥ ‘of Consignment Out aecount). “1. Summary of ledgor accounts, Consignment Out —R. Solis . $0,000 Merchandise Inventory , . - 50,000 Contignment Out =R. Sot . $00 / $00 7,900 a eae, Consignment Out ~ R. Solis. 5,300 Consignment Profit... | f $300 Consignment Out ~ R. Solis See eeu crenenree 20 “Merchandise Inventory... . 50,000 FreightOut. 2.2... -- Cash Jess Cash “Advances from Consignee - 500 500 7,000, 7,000 Cartage, ey ‘Commission Expense. <>) ‘Advances from Consignee | < Cost of Sales 4... 2... 50,000, Merchandise on Consignment $0,000. ‘Merchandise on Consignment _ a)Mlustration 86 50,000 (0 Betamax sets to R. Solis each cost. 50,000 a 500 500 Cash Fe ‘Advances from Consignee - 7,000 Simatic details of transactions Consignment Out — R. Solis 5,300 HEUTE ERR Eeby the ae Let us how change our sons seam that only six of the ten Betamax sots-cons) signed by Nation Co. to R, Solis were sold a the balance’ oe eras was ais fully re- mitted. ‘Mlustration. Assume that'the consignee submits the following account sales: Sales (6 Betamax sets @ #7,000).. 2.5 a eke eee ee 742,000 aa Comiion 42,060 - 8,600 Due ic consignor . 33,400 Lets Advances 770,000 x 108). 7,000 Balance 26.400 Remittance . 20,000. ‘Outstanding balance. ? 6,400 Ttemson Hand ... . “4 sets ‘The journal entries to be recorded in the books of the consignor and the ledger accounts under the two methods are shown in Illustration 8-7 (the perpetual inventory? system is used) and in Illustration 8-8 (the periodic inwentory system is used). Inventoriable and Non-inventoriable Costs With respect to the tabular computations of ovine profit and cost of inventory in* the hands of the consignee (Illustration 8-9), it is important to distinguish the cost and expense to be allocated to the sold.and unsold units (im eerie cena those which are niet allocated (nortinventoriable costs). ‘The inventoriable costs include the fee ost of merchandise and subsequent expenses. that increase its value. These are properly deferred to future periods to be matched against rela- ted revenues to the extent thai these costs attach to unsold units. Freight and insurance paid by ‘the consignor and consignee are examples of expenditures aul regarded as iene the value of the consigned units, On the other hand, the non-iaventoriable costs are those expenditures that fal toad 40. the unsold consigned units and are accordiigly charved to expense in the rs they. curred. Examples of these expenditures are. advertising, delivery and and other selling ont of the consignee.Mtustration 8-7 Nation Company. (Consignor) dee Journal Entries and ‘Ledger Accounts for an Uncompleted Consignment ~ Gate (Perpetual Inventory System) eae Prof Not Becca Seperanl ‘Merchantlise See © $0,000 © Consignment». 2s. 2 (75,000 = 6 seer = 30,000) Deferred Consignment Costs. Freight-Out (4/10 x 7500) Cartage (4/10 x F200)...Mlustration 8-9 ecapeleto of Goosen froth saa oa oF Weer co (Books of Consignor) ‘ ‘Charges Related 10 Total Charges Consignment Sales Inventory on Consignment (20 ser) (6 sets) sets) 750,000 730,000 20,000 $00 200 8,400 ¥59.100 Consignment Out — R. SolisMlustration 8-8 : Nation Company (Consignor) ee Entries and Ledger Accounts for an Uncompleted Consignment (Periodic Inventory System) ‘Consignment Profit Determined Separately ‘Consignment Profit Not Determitned Separately ‘Consignment Out —R, Solis . $0,000 Shipped 10 Betamax sets to R. Solis each ‘Consignment Shipments . - 50,000 costing 5,000 and each to be sold at P7,000. ‘Consignment Out -R. Solis . $00 6. To set up total cost of merchandise on consignment (See Mustration 8-9),Deferred Consigizront Costs The manner bf recording and. disclosing the iene ent sales has been previously discussed with illustrative aie (illustrations 8-7 and 8-8). Both methods: presented are in accordance with the concepts of net asset valuation and ~ matching of revenues and expenses.) ~ oe oi foe Po ay ‘When consignment profits are not determined separately, inventoriable costs such as cart- age and freight expenditures are charged directly to their usual expense classitications. These expense accounts would have been adjusted at the end of the period to defer the cost of P280 allocated to the unsold units. This is done by debiting Deferred Consignment Costs. ail ance of deferred consigmnent costs account would remain at #280 until the end of the succeed- ing period at which time it would require another adjustment, ~ : Advances from Consignee A consignor may, by agreement, draw from the consignee a portion of the estimated sales price at the time of making the consignment. The amount of such advance received by the con- signor should be credited to a liability account, Advances front Consignees, and not to the Con- signment Out account. The Consignment Out account should show the asset value of the goods on consignment, not net of a liability to the consignee. The advance would be shown as liability on the balance sheet until it is applied in the settlement for sales. Retum of Goods By Consignee We have emphasized that all costs and expenses that increase the value of merchandise, whether paid directly by the consignor or by the consignee, ate properly included in the inven- tory. However, if the consignee for whatever reason returns goods to the consignor, the ex- penses incurred such as packing and shipping costs on the original outhound shipment should ‘be written off-as expense of the current period and therefore be charged to sold units. Any “charge bome by the Consignee on ae seturn shipment a also. be peste as an expense. In the books of the consignee, the returned goods are recorded by a memorandum entry while in the books of the consignor, the cost of the returned goods received is recorded. Ee reversing the entry originally made when the consignment — was o- ‘Mustraion. “Assn the sane dats uae i Uwiisons excep} tha one top ured by the consignee. Illustration 8-10 shows the computation: oe profit and cost of, unsold goods if goads are retumed by the consign.Malesoy x 710 _Cen00 x 7/10In the event that Deferred Consignment Costs account is used, it should be classified as a current asset, sth as prepaid expen o ax prt of inventories, shown below : Income Statement The operating data for consignment transactions are often included with other reported revenues and However, the authors recommend the following form of disclosure (Ifhus- tration 8-11) if consignment selec tea en eas with stzoct fn total seveset: The eahuse in the illustration are hypothetical. Mlustration 8-11 Solis pantet Corporation come Statement For the Year Ended December 31, 19x5 Reguler Totat Sates ‘Sales 200,000 280,000 116,000 164,000 84,000 116,006 28,000 44,000 50,000 50, 78,000 94,000 sie) iain This presentation gives full information concerning both consignment and regular opera- tions. Consignment profit and loss data may also be summarized in a supporting schedule with only the net results from consignment operations reported in the income statement, Mlustration 8-12 shows the alternative presentation._‘Mbustration 8-12 ~ Bolls Brothers Corporation .. Income Statement " For the Year Ended December 31, 19x5 ‘Net income from regular sales. Consignment profit (Schedule 1 Net income 5. . “The rctedues:Mafsted' ix ‘the preceding sections of this chapter are the standard ac- counting procedures steer wll we ‘keep profit and loss in detail, may likewise wish to ri bad ly SG Canta poe Gd Hew'ea oe taser ooccoret In this event, the procedures for the idesign tant Ot Debits: A. The ela ols shipped to the consignee, (UE the perpetual inventory system is used, credit Merchandise Inventory. If the [ere eecy copa system is used, credit Consignment Shipments.) 2. Any expense incurred on the consigned goods which is relmbed. by. the consignee, (Credit Cash or a liability account. In some occassions where there is a reclassification, eredit an expense account.) Cost of merchandise sold by the consignee: plus any related expense of sale. (Debit the cost of thg merchandise sold to Cost of Consignment Sales. Debit also related expenses to Consignment Expenses.) F i i Consignment Sales ie Debit: Debited when the books are closed. (Credit Income Summary.) Credit: Selling price of goods sold by us ae: (Debit Cash; in some in- Hangee dain meet seretat ‘Consignment. Stiganects (Teco in ebtie inventory system.) Debit: . x re Cost of goods sold by the consignee. (Credit Income Summary.) Cost of goods shipped to the consignee, (Debit Consignment Out.) ‘The credit balance of this account represents unsold consigned goods at the end ‘of the period. On the income statement, the balence of this apie: Ear from, Cost of Goods Available for Sale in de the cost of saies of mon £ consignment or regular sales. a247 ‘Method I. Conipaneit sales are not kept separate from other sales. Perpetual inventory sys- tem is used. Consignment Out Debit: Cost of goods shipped to the consignee. (Credit Merchandise Inventory ) Credit: ‘Cost of goods sold by the consignee. (Debit Cost of Goods Sold.) Notice that consignment expenses are not debited to this account, as they were under Method I. Expenses of consigned merchandise are never debited to Consign- ment Out if consignment sales are not Kept separate. This is quite logical because there is little point in keeping special records for consignment expenses if there are ‘no separate records for consignment expenses. The expenses on consigned merchan- dise are, therefore, treated just like any other expense and are debited to appro- Priate expense accounts. Method IIL Consignment sales are not kept separate from other sales. Periodic inventory sys- tem is used. Consignment Out Debit: . ‘Cost of goods shipped to the consignee, (Credit Consignment Shipments.) Credit: Cost of goods sold by the consignee. (Debit Consignment Shipments.) Debit: Gk ot caidas sd Uy Gok congas (Conti Comignesens Out )