CONSIGNMENTS

AN ENTITY SHALL APPLY THE PRINCIPLES SET FORTH

UNDER PFRS 15 REVENUE FROM CONTRACTS WITH
CUSTOMERS IN ACCOUNTING FOR REVENUES FROM
CONTRACTS WITH CUSTOMERS, REGARDLESS OF THE
NATURE OF THE PRODUCT ENTERED INTO WITH A
CUSTOMER, EXCEPT FOR LEASE CONTRACTS, INSURANCE
CONTRACTS, FINANCIAL INSTRUMENTS, AND NON-
MONETARY EXCHANGES BETWEEN ENTITIES IN THE SAME
LINE OF BUSINESS TO FACILITATE SALES TO CUSTOMERS.
 CONSIGNMENT ARRANGEMENTS

Under a consignment arrangement, an entity (consignor) delivers goods to

another party (consignee) who undertakes to sell the goods to end customers
on behalf of the consignor.
The consignor recognizes revenue only when the consignee sells the
consigned goods to end users because it is only at this point that the control of
the asset is transferred to the customer.
Accordingly, the consigned goods are included in the consignor’s inventory.
The consignee records the consigned goods through memo entries only.
Freight and other incidental costs of transferring consigned goods to the
consignee (e.g., transportation and insurance) form part of the cost of the
consigned goods. Repair costs for damages during shipment and storage and
other maintenance costs are charged as expense.

When the consigned goods are sold to end customers,

 The consignor recognizes revenue at the gross amount consideration, i.e.,
the sale price agreed with the consignee.
 The consignee recognizes revenue at the commission or fee to which it is
entitled.
Illustration 1: Consignment sales
ABC Co. enters into a consignment arrangement with XYZ, Inc. Under the
arrangement, ABC Co. transfers goods to XYZ, Inc. which XYZ, Inc. undertakes to
sell on behalf of ABC Co. In exchange, XYZ, Inc. is entitled to a 20% commission
based on sales.
April 1 XYZ, Inc. accepts delivery of consigned goods with total sales value of
P390,000. The cost of those goods to ABC Co. is P220,000.
April 3 XYZ, Inc. sells consigned goods, costing P55,000, for P100,000. ABC
Co. is not notified of the sale.
April 7 XYZ, Inc. makes the weekly remittance of sale proceeds, net of
commission to ABC Co.
Illustration 2: Consigned goods
ABC Co. consigned goods costing P10,000 to XYZ, Inc. Transportation
costs of delivering the goods to XYZ totaled P2,000. Repair costs for
goods damaged during transportation totaled P500. To induce XYZ, Inc. in
accepting the consigned goods, ABC Co. gave XYZ P1,000 representing an
advance commission. How much is the cost of the consigned goods?

Answer: P12,000 (10,000+2,000)

 PRINCIPAL VS. AGENT CONSIDERATIONS

When another party is involved in providing goods or services to customer,

the entity shall determine whether it is acting as a principal or an agent. The
entity is a principal if it controls the good or service before the good or service
is transferred to the customer. However, the entity is not necessarily a
principal if it obtains legal title of a product only momentarily before legal
title is transferred to the customer.
A principal may personally satisfy a performance obligation or it may engage
another party (for example, a subcontractor) to satisfy some or all of a
performance obligation is satisfied, the principal recognizes revenue at the
gross amount of consideration.
The entity is an agent if its performance obligation is to arrange the provision of
goods or services by another party. When the performance obligation is satisfied,
the agent recognizes revenue the commission or fee to which it is entitled.
The following are indicators that an entity is an agent (and therefore does not
control the good or service before it is provided to customer):
a) Another party is primarily responsible for fulfilling the contract.
b) The entity does not have inventory risk before or after the goods have been
ordered by a customer during shipping or on return.
c) The entity does not have discretion in establishing prices for the other party’s
goods or services and, therefore, the benefit that the entity can receive from
those goods or services is limited.
d) The entity’s consideration is in the form of a commission; and
e) The entity is not exposed to credit risk for the amount receivable from a
customer in exchange for the other party’s goods or services.

Illustration 1: Arranging for the provision of goods or services

ABC Co. operates a website that enables customers to purchase goods from a
range of suppliers who deliver the goods directly to the customers. When a
good is purchased via the website, ABC Co. is entitled to a 10% commission
based on the sales price. ABC Co. requires non-refundable payment from
customers before orders are processed. ABC Co. has no further obligations to
the customer after arranging a sale.
Illustration 2: Promise to provide goods or services
ABC Co. enters into a contract with a cCustomer for equipment with unique specifications.
ABC Co. and the customer develop the specifications for the equipment. ABC Co. then
communicates the specifications to a supplier which ABC Co. subcontracts to manufacture the
equipment.
The supplier shall deliver the equipment directly to the customer. Upon delivery, ABC Co.
shall pay the supplier the agreed subcontract price.
ABC Co. and the customer negotiate the selling price of which the customer is given a 30-day
credit term. ABC Co. profit is based on the difference between the selling price negotiated with
the customer and the subcontract price charged by the supplier.
The contract between ABC Co. and the customer requires the customer to seek remedies for
defects in the equipment from the supplier under the supplier’s warranty. However, ABC Co. is
responsible for any corrections to the equipment required resulting from errors in
specifications.
Illustration 3: Promise to provide goods or services
ABC Co. agrees to purchase a specific number of tickets from the major
airlines at reduced prices and resells them at a higher price. ABC Co. must
pay for those tickets regardless of whether it will be able to resell them. ABC
Co. determines the prices at which the tickets are resold to customers.
Customers pay as they purchase tickets therefore ABC Co. has no credit risk.
ABC Co. also assists the customers in resolving complaints with the service
provided by the airlines. However, each airline is responsible for fulfilling
obligations associated with the ticket, including remedies to a customer for
dissatisfaction with the service.
Illustration 4: Arranging for the provision of goods or services
ABC Co. sells vouchers that entitle customers to significant discounts on future
meals at specified restaurants. ABC Co. does not purchase the vouchers in advance
but rather purchases them only upon customer request.
ABC Co. and the restaurants jointly determine the prices at which the vouchers will
be sold to customers. ABC Co. is entitled to 30% of the voucher price when it sells
the voucher. Customers pay as they purchase the vouchers and payments are non-
refundable. Therefore, ABC Co. has no credit risk.
ABC Co. also assists the customers in resolving complaints about the meals and has
a buyer satisfaction program. However, the restaurant is responsible for fulfilling
obligations associated with the voucher, including remedies to a customer for
dissatisfaction with the service.
MULTIPLE CHOICE Computational
PROBLEM 1

On November 30, 20x1, Northup Co. consigned 90 freezers to Watson Co. for
sale at P1,600 each and paid P1,200 in transportation cost. A report of sales was
received on December 30, 20x1 from Watson reporting the sale of 20 freezers,
together with a remittance that was net of the agreed 15% commission. How
much, and what month, should Northup recognize as sales revenue?

November December
a. 0 32,000
b. 0 27,200 Selling price P1,600
c. 144,000 0 Units sold * 20
32,000 P32,000
d. 142,000 0
PROBLEM 2

On December 1, 20x1, Alt Department Store received 505 sweaters on

consignment from Todd. Tood’s cost for the sweater was P80 each and they were
priced to sell at P100. Alt’s commission on consigned goods is 10%. At
December 31, 20x1, 5 sweaters remained. In its December 31, 20x1 balance
sheet, what amount should Alt report as payable on consigned goods?

a. 49,000
b. 45,400 Selling price P 100
c. 45,000 Units sold * 500
d. 40,400 Gross Amount P 50,000
* 90%
Payable P45,000
PROBLEM 3

On October 20, 20x1, Grimm Co. consigned 40 freezers to Holden Co. for sale at
P1,000 each and paid P800 in transportation costs. December 30, 20x1, Holden
reported the sale of 10 freezers and remitted P8,500. The remittance was net of
agreed 15% commission. What amount should Grimm recognize as sales revenue
for 20x1?

a. 7,700
b. 8,500 Selling price P 1,000
c. 9,800 Units sold * 10
Gross Amount P 10,000
d. 10,000
PROBLEM 4

On January 1, 20x1, DEF Co. paid P5,000 for the insurance of consigned goods,
while in transit, shipped to consignee, and P7,000 for the freight. In addition,
DEF Co. advanced P5,000 as part of the commission that will be due when the
consignee sells the goods. The consigned goods cost DEF P50,000 and will be
sold for the total amount of P80,000. What is the total amount of inventory
should DEF report for the consigned goods?

a. 50,000
b. 62,000 Cost P50,000
c. 67,000 Insurance In-transit 5,000
d. 97,000 Freight 7,000
Total Cost of Inventory P62,000
Stone Company had the following consignment transactions during December 2001:
Inventory shipped on consignment to Beta Company 18,000
Freight paid by Stone 900
Inventory received on consignment from Alpha Company 12,000
Freight paid by Alpha 500
No sales of consigned goods were made through December 31, 2001.

5. Stone’s December 31, 2001 balance sheet should include consigned inventory at:
a. 12,000
b. 12,500 Inventory shipped on consignment
c. 18,000 to Beta Company 18,000
d. 18,900 Freight paid by Stone 900
Total 18,900
The following items were included in Opal Company’s inventory account at December 31,
2001:
Merchandise out on consignment, at sales price,
including 40% markup on selling price 40,000
Goods purchased, in transit, shipped FOB shipping point 36,000
Goods held on consignment by Opal 27,000

6. By what amount should Opal’s inventory account at December 31, 2001 be reduced?
a. 103,000
b. 67,000 Mark-up on consigned goods
c. 51,000 [40,000 – (40,000 x 60%)] 16,000
d. 43,000 Goods held on consignment by Opal 27,000
Decreased by 43,000
Use the following information for the next two questions:

ABC Company consigned twelve refrigerators to XYZ, In. The refrigerators cost P6,000 each
and the consignor paid P720 for freight out. The consignee subsequently rendered and account
sales for five units sold at P7,700 each, and deducted the following items 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) P30

ales (7,700 x 5) 38,500
ess: Cost
7. How(6,000
muchxwas
5) the net profit
30,000
of the consignor on the five refrigerators sold?
Freighta. (720 x 5/12)
3,815 300
Commission
b. 37,780[10%(38,500-C)] 3,500
c. 4,200
Marketing (3,500 x 10%) 350
d. and
Delivery 3,395
Installation 150 34,300
et profit 4,200
8. How much was the net remittance of the consignee on the five refrigerators sold?
a. 34,500 Sales (7,700 x 5) 38,500
b. 33,780 Less: Commission (35,000 x 10%) 3,500
c. 4,500 Marketing (3,500 x 10%) 350
d. 4,200 Delivery and Installation 150 4,000
Net Remittance 34,500
On January 1, 20x1, Pete Electrical Shop received from Marion Trading 300
pieces of bread toasters. Pete was to sell these on consignment at 50% above
cost, for a 15% commission on the selling price. After selling 200 pieces, Pete
had the remaining unsold units repaired for some electrical defects for which he
spent P2,000. Marion subsequently increased the selling price of the remaining
units to P330 per unit. On January 31, 20x1, Pete remitted P64,980 to Marion
after deducting the 15% commission, P850 for delivery expenses of sold units,
and P2,000 for the repair or 100 units.
The consigned goods cost Marion Trading P200 per unit, and P900 had been
paid to ship them to Pete Electrical Shop. All expenses in connection with the
consignment were reimbursable to the consignee.
14. The consignment profit on units sold was
a. 12,200 b. 12,880 c. 13,000 d. None of these

15.The value of inventory on consignment was

a. 8,120 b. 8,800 c. 8,920 d. None of these