BCSVillaluz

PUP Accounting for Special Transactions Review Session

Handout no. 3 – Revenue from Consignment Arrangements

NATURE OF CONSIGNMENT
A consignment constitutes the transfer of possession of merchandise without the transfer of title from the owner, called the
consignor, to another person, called the consignee. The consignee acts as an agent in behalf of the consignor for the purpose of
selling the goods for a commission.

The shipment of goods to the consignee is not treated as a sale. Although a transfer of goods has taken place, it is not the intent of
either the consignor or the consignee that sale and purchase transactions takes place. Title of the goods remains with the consignor,
and recognition of the sale is deferred until goods are transferred to a third party by the consignee.

MAIN FEATURES OF CONSIGNMENT

1. The consigned goods remain the inventory of the consignor.
2. All expenses incurred by the consignee on the consigned goods are reimbursable by the consignor.
3. The consignee is expected to take reasonable care of the consigned goods.
4. The consignee is not liable to pay the consignor until the goods are sold to a third party.

ACCOUNTING FOR CONSIGNMENT

1. Consignor accounting
Inventory on consignment account is debited for:
• Cost of goods shipped on consignment.
• Expenses related to consignment incurred by the consignor.
• Reimbursable expenses related to the consignment paid by the consignee.

Inventory on consignment account is credited for:

• Cost of goods returned by the consignee.
• Cost of consignment sales and expenses relating to consignment.

2. Consignee accounting
Consignor receivable account is:
• Debited for expenses paid by the consignee but chargeable to the consignor.
• Credited when remittance is made to the consignor.

Consignor payable account is:

• Credited for the sales by the consignee.
• Debited when remittance is made by the consignor.

Costs and expenses for consignment transactions

1. The following items are to be allocated between sold and unsold items:
(a) Freight cost paid by the consignor upon shipment
(b) Freight and cartages paid by the consignee upon receipt of the shipment
(c) Insurance freight of consigned goods
(d) Packaging costs of consigned goods
(e) Costs and fees such as repairs, installations of devices paid by the consignor and/or consignor related to the consigned
goods.

2. The following items are charged to the sold units:

(a) Commissions
(b) Delivery and installation
(c) Advertising
(d) Reconditioning on delivered units to customers
(e) Insurance in transit to customers
(f) Expenses related to returned units delivered

Problem 1: (Consignment Revenue Recognition)

On November 30, 2020, Blizzard Company consigned 90 freezers to SM Appliance Store, Inc. for sale to customers and paid P1,200 in
transportation costs. A report of sales was received on December 30, 2020 from SM Appliance Store, Inc. reporting the sale of 20 freezers,
together with the remittance of the P27,200 balance due. The remittance was net of the agreed 15% commission.

1. How much is the agreed selling price per freezer? 1,600

2. How much and in what month should Blizzard Company recognize consignment sales revenue? 32,000 in December

Problem 2: (Computation of Remittance due; profit from consignment; cost of consigned inventory)
On May 30, 2021, Sheer Cold Inc. consigned 80 freezers to, costing P50,000 each, to XM Appliances Company. The cost of shipping the
freezers amounted to P84,000 and was paid by Sheer Cold Inc. On December 30, 2021, a report was received from the consignee,
indicating that 50 freezers had been sold for P75,000 each. Remittance was made by the consignee for the amount due after deducting
a commission of 6%, advertising of P20,000, and total installation costs of P32,000 on the freezers sold.

____________________________________________________________________________________________________________
Brian Christian S. Villaluz, CPA
CPA Reviewer in:
Advanced Financial Accounting & Reporting (AFAR)
Financial Accounting & Reporting (FAR)
Auditing (AUD) Page 1 of 2
 BCSVillaluz
Required:
1. Compute the inventory value of the units unsold in the hands of the consignee.
2. Compute the profit for the consignor for the units sold.
3. Compute the amount of cash that will be remitted by the consignee.

1 Original cost of consigned freezers (80u x P50T/u) 4,000,000.00

Add: Shipping fee 84,000.00
Total cost 4,084,000.00
Divided by: # of freezers consigned 80
Cost per freezer 51,050.00
X: # of freezers unsold 30
Cost of EI 1,531,500.00

2 Sales (50u x P75T/u) 3,750,000.00

Less: CGS (50u x 51,050/u) 2,552,500.00
Gross profit 1,197,500.00
Commission (3.75M x 6%) (225,000.00)
Advertising (20,000.00)
Inst. Cost on units sold (32,000.00)
Profit on consignment 920,500.00

3 Proceeds from sale 3,750,000.00

Less: Commission (225,000.00)
Reimbursable expenses (20T + 32T) (52,000.00)
Cash remittance 3,473,000.00

Problem 3:
Lancelot Manufacturing Corp. consigned 10 refrigerators to Odette Sales Co. These refrigerators had a cost of P180 each. Freight on the
shipment was paid by Lancelot in the amount of P120.

Odette Sales Co. submitted an account sales stating that it had sold 6 refrigerators and remitted the P1,365 balance due to Lancelot after
the following deductions from the selling price of the refrigerators:
Commission 15% of selling price
Marketing expenses P90
Delivery and installation of items sold 60
Cartage cost paid upon receipt of consignment 15

1. The consignee sold the six refrigerators for a total of… P1,800
2. The commission earned on the sale of the six refrigerators by the consignee was… P270
3. The consignor’s net profit from the sale of the consigned good was… P219

Problem 4: (Consignment with payment terms)

On November 1, 2020, the Western Appliance Center ships five (5) of its appliances to the North Star Store on consignment. Each unit
is to be sold at P25,000 payable P5,000 in the month of purchase and P1,000 per month thereafter. The consignee is entitled to 20% of
all amounts collected on consignment sales. North Star Store sells three (3) appliances in November and one (1) in December. Regular
monthly collections are made by the consignee, and appropriate cash remittances are made to the consignor at the end of each month.
The cost of the appliances shipped by the consignor was P15,500 per unit. The consignor paid shipping costs to the consignee totaling
P5,000.

1. The profit on consignment for 2020 is…14,000

2. The total amount remitted to consignor for the year 2020 is… 18,400

END OF HANDOUT

____________________________________________________________________________________________________________
Brian Christian S. Villaluz, CPA
CPA Reviewer in:
Advanced Financial Accounting & Reporting (AFAR)
Financial Accounting & Reporting (FAR)
Auditing (AUD) Page 2 of 2