Consignment Accounting

TERUEL, MARIA NICOLE

PROBLEM 1: TRUE OR FALSE

TRUE 1. Under a consignment arrangement, the consignor recognizes net revenue equal to gross
sales price less the consignee’s commission.
FALSE 2. A consignor recognizes revenue when the consigned goods are transferred to the consignee.
TRUE
3. If another party is primarily responsible for fulfilling a contract with a customer, this may
indicate that the entity is an agent.
FALSE 4. Pinewood Co. agrees to create an artifact for Sagada Co. Pinewood is primarily liable for
the artifact's conformance with the customer's specifications. Pinewood does not have the
required expertise so it subcontracts Saleng Co. to do the manufacturing. If the entire
manufacturing process is outsourced from Saleng Co., Pinewood would be acting as an
agent of Saleng.
FALSE 5. Fight Club Co. enters into a contract with Tough Co, a promoter of mixed martial arts
(MMA) Fights. Under the contract, Fight Club Co. purchases MMA event tickets from
Tough at a negotiated price and resells them to end customers at a marked-up price. Fight
Club bears the loss for unsold tickets. The arrangement between Fight and Tough implies
a principal-agent relationship whereby Fight is an agent of Tough.

PROBLEM 2: MULTIPLE CHOICE-THEORY

1. Which of the following indicates that an entity is acting as an agent rather than principal?
a. The entity is primarily responsible in fulfilling the contract.
b. The entity has the discretion in establishing the price at which the good or service is
sold to a customer.
c. The entity bears the loss if the customer fails to pay the sale price.
d. The entity does not have inventory risk.

2. When should a consignor recognize revenue from a consignment sale?

1. When the consignor sells the goods to the consignee
2. When the consignee sells the goods to the end customer.
3. At the point of time indicated in the contractual arrangement between the consignor
and the consignee.
4. Any of these

3. How should each of the following recognize revenue from the sale of consigned goods to
end customers?
Consignor Consignee
a. Gross Amount of sale price Commission or fee
b. Sale price net of commission Commission or fee
c. Net amount of sale price Mark up
d. Fee Commission
 4. Consignor Co. paid the in-transit insurance premium for consignment goods shipped to
Consignee Co. In addition, Consignor advanced part of the commission that will be due
when Consignee sells the goods. Should Consignor include the in-transit insurance
premium and the advanced commissions in inventory costs?

Insurance premium Advanced commission

a. Yes Yes
b. No No
c. Yes No
d. No Yes

5. Entity A consigns goods to Entity B. Normally, end customers buy over-the-counter from
Entity B. However, in some cases, Entity B ships the goods to the customer. Entity B
deducts the shipping cost from the amount remitted to Entity A. How should Entity A
account for the shipping cost?
a. Freight in
b. Commission expense
c. Receivable
d. Freight out

PROBLEM 3: EXERCISE
Publisher Co. delivers 1,000 books to Bookstore Co. under a consignment arrangement. The cost
per book is P300. Publisher Co. pays freight of P22 per book. Bookstore Co. is entitled to a 20%
commission based on the Publisher's suggested retail price. However, Bookstore Co. marks up the
Publisher's suggested retail price anyway for another 15%. Six (6) months after the end of the
semester, Bookstore Co. remits P245,700 to the Publisher for the sale of 700 books, after deduction
of P69,300 for the following:
• 2% withholding tax based on the publisher's suggested retail price.
• Bookstore's commission.
Requirements:
a. Compute for the amounts to be presented in Publisher's statement of profit or loss?
b. How much is the ending inventory to be presented in Publisher's statement of financial
position?
c. How much income is recognized by Bookstore?
Requirement (a):

Sales (245,700 + 69,300) 315,000

Cost of books (700 books × 300) -210,000
Freight charge (700 books × 22) -15,400
Commission expense (315,000 × 20%) -63,000
Net Profit 26,600
 Requirement (b):

Inventory (300 books × 300) 90,000

Freight cost (300 books × 22) 6,600
Total ending inventory 96,600

Requirement (c):

Commission income (315,000 × 20%) 63,000

Income from sale of books (315,000 × 15%) 47,500
Total Revenue 110,500

PROBLEM 4: MULTIPLE CHOICE - COMPUTATIONAL

1. Yahama Co. consigns bass guitars costing P500,000 to a consignee. Yahama incurs
P20,000 freight in transporting the goods to the consignee's place and P5,000 repair costs
for minor damages during shipment. To induce the consignee in signing the consignment
contract, Yahama pays the consignee an advanced commission of P100,000 to be deducted
from the consignee's actual commission on future sales. How much is the cost of the
consigned goods in Yahama's and the consignee's books?
Yahama Consignee
a. 520,000 0
b. 525,000 0
c. 520,000 100,000
d. 625,000 0

2. Falling Leaves Co. consigned 50 units of a certain product to consignee on August 1, 20x1.
The products originally cost P10,000 apiece and are marked to sell for P25,000 each. Falling
Leaves Co. incurred P25,000 in shipping the products to the consignee. At month-end, the
consignee remitted P960,000, net of the agreed commission of 20%. Falling Leaves Co. would
report which of the following?
Revenue Profit
a. 1,200,000 696,000
b. 1,200,000 456,000
c. 960,000 504,000
d. 960,000 480,000

3. The following items were included in Opal Co.'s inventory account at December 31,
20x1:
Merchandise out on consignment, at sales price, 40,000
including 40% markup on selling price
Goods purchased, in transit, shipped FOB shipping point 36,000
Goods held on consignment by Opal 27,000
By what amount should Opal's inventory account at December 31, 20x1 be reduced?
a. 103,000 b. 67,000 c. 51,000 d. 43,000 (AICPA)
Use the following information for the next two questions:
ABC Co. consigned twelve refrigerators to XYZ, Inc. The refrigerators originally cost P6,000
each. ABC paid freight of P720 on the transfer. The consignee subsequently reported sale of five
units, each sold for 7,700.00 and deducted the following from the selling price:
Commission (based on sales net of commission) 10%
Marketing expense (based on commission) 10%
Delivery and installation (on each unit sold) 30.00
4. How much was ABC's profit on the five refrigerators sold?
a. 3,815 b. 37,780 c. 4,200 d. 3,395 (RPCPA)

5. How much was the consignee's net remittance for the sale?
a. 34,500 b. 33,780 c. 4,500 d. 4,200 (RPCPA)

SOLUTION: PROBLEM 4: MULTIPLE CHOICE - COMPUTATIONAL

#1

In the books of Yamaha

Cost of goods sent 500,000
Add: Freight expense 20,000
Repair expense 5,000
Total Cost of goods sent 525,000

#2

Revenue from consignment sale

Revenue: 960,000/0.8 = 1,200,000

Profit from consignment sale

Revenue 1,200,000
Less: Cost of product 480,000
Shipping costs 24,000
Commission 240,000
Profit on sale 456,000

#3

Computation of Opals Inventory account at December 31,

20x1 be reduced:

Mark up on consignment goods (40,000 ×

40%) 16,000
Goods held on consignment 27,000
Opals inventory account 43,000
#4

Sales (7,700 × 5) 38,500

Less: Cost (6,000 × 5) 30,000
Freight (720 × 5/12) 300
Commission (35,000 × 10%) 3,500
Marketing (3,500 × 10%) 350
Delivery and Installation 150 34,300
ABC’s Profit 4,200

#5

Sales (7,700 × 5) 38,500

Less: Commission (35,000 × 10%) 3,500
Marketing (3,500 × 10%) 350
Delivery and Installation 150 4,000
Net Remittance 34,500