Chapter Three

Accounting for Installment and Consignment Sales Contract

Introduction

Goods purchase by buyer by paying a small amount of the total amount of goods at the time of
purchase of goods and agrees to pay the remaining amount in equal installments in equal interval
of time is known as installment. The first time payment is known as “down payment”. In
installment sales, the risk and rewards are transferred to the buyer.

An installment sale is a special type of credit arrangement which provides for payment in
periodic installments over a predetermined period of time and results from the sale of real estate,
merchandise, or other personal property. In the ordinary credit sale, the collection interval is
short (30–90 days) and title passes unconditionally to the buyer concurrently with the completion
of the sale (delivery). In contrast, in an installment sale the cash down payment at the date of sale
is followed by payments over a longer period of time, and in many states the transfer of title
remains conditional until the debt is fully discharged.

Methods of Recognition of Profit on Installment Sales

While many sales are in certain collection, some others are uncertain. The degree of the
uncertainty (on the collection) may vary; some could be not so uncertain (with shorter time-span)
and others are heavily uncertain. So, how do we treat sales when collection is uncertain, under
the IFRS?

There are two issues that an accountant would need to address under such situation. First is the
revenue-expense matching, and second is the interest recognition that usually comes along the
transaction.

Under the IASB’s Framework, revenue is defined as income arising from the ordinary activities
of an entity and may be referred to by a variety of names including sales, fees, interest,
dividends, and royalties. The most common revenue recognition system is based on the accrual
method. According to IFRS for recognizing revenue under the accrual basis of accounting,
revenues are recognized when realized or realizable and earned when the products are delivered
or services are performed. In addition, expenses related to that revenue should be recognized and
matched against the revenue.

The question here is whether to recognize the gross profit from installment sales are recognized
in full in the accounting period in which the sale made or spread over the term of the installment
contract. The determination of the point in time when a reporting entity is considered to have
transferred the significant risks and rewards of ownership in goods to the buyer is critical to the
recognition of revenue from the sale of goods.

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However, in installment sales, where receivables are collectable over an extended period of time
and there is no reasonable basis for estimating the degree of collectability. Because of the
uncertainty involved in collecting the accounts to be received over an extended period of time
may suggest the postponement of revenue recognition until the probability of collection can be
reasonably estimated.

According to IFRS, two methods are used to record the installment sales when the collection of
those sales is uncertain: (a) installment method; and (b) cost recovery method.

Sales Under the Installment Method

The installment method is one of several approaches used to recognize revenue. The installment
method places emphasis on collection of cash, rather than the period of sale. This does not mean
that revenue is considered unrealized until the entire sales price has been collected but rather
revenue realization is proportionate to collection. This is due to the fact that the ultimate profit is
more uncertain in installment sales than in ordinary sales because collection is more doubtful.

Under the installment method, both revenue and the associated cost of goods sold are recognized
at the time of the initial sale, but gross profit recognition is deferred until cash payments are
received. This method requires the accountant to track the gross margin percentage for each
reporting period, so the correct percentage can be recognized when the associated cash receipts
arrive at a later date.

Under the installment-sales method of accounting, emphasis is placed on collection rather than
sale. Because of the unique characteristics of installment sales, particularly the longer collection
period and higher risk of loss through bad debts, gross profit is considered to be realized in
proportion to the collections on the installment accounts. Thus, under the installment-sales
method, each collection on an installment account is regarded as a partial recovery of cost and a
partial realization of gross profit (margin) in the same proportion that these two elements are
present in the original selling price.

In the application of the installment-sales method, most companies record operating expenses
without regard to the fact that some portion of the year’s gross profit is to be deferred revenue.
This is often justified on the basis that: (1) these expenses do not follow sales as closely as does
the cost of goods sold, and (2) accurate apportionment among periods would be so difficult as
not to be justified by the benefits gained.

Example: To illustrate the installment sales method of accounting, assume the following data for
XYZ enterprise:

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 2005 2006
Installment sales $250,000 $240,000
Cost of Installment sales (190,000) (168,000)
Gross Profit 60,000 72,000
Gross profit rate 24% 30%
Cash received:
From 2005 sales 100,000 150,000
From 2006 sales __ 80,000

Required: Determine the realized and deferred gross profit and pass the necessary journal
entries at the end of each year using installment method.

Solution:

1. To record installment sales

2005 2006
Installment A/Receivable................. 250,000 240,000
Installment sales ......................... 250,000 240,000

2. To record cost of goods sold

2005 2006
Cost of Installment sales .................. 190,000 168,000
Inventories .............................. 190,000 168,000

3. To record deferred gross profit

2005 2006
Installment Sales ............................... 250,000 240,000
Cost of Installment sales .......... 190,000 168,000
Deferred gross profit ................ 60,000 72,000

4. To Record cash collections on installment receivables

2005 2006
Cash........................................................... 100,000 230,000
Installment A/Receivable (2005) ............... 100,000 150,000
Installment A/Receivable (2006) ............... _ 80,000

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5. To record realized gross profit on installment sales
2005 2006
Deferred Gross Profit (2005) ................. 24,000 36,000
Deferred Gross Profit (2006) ................. - 24,000
Realized Gross Profit .............. 24,000 60,000

6. To close the realized gross profit to income summary

2005 2006
Realized Gross Profit ..................... 24,000 60,000
Income Summary................. 24,000 60,000

Defaults and Repossessions

Since customers in installment sales are given an extended period of time in making payments,
the seller involves a greater risk for the collectability of installment sales receivable. To protect
themselves against this greater risk of uncollectability, sellers of real or personal property on
installment basis generally select a form of contract called security agreement that enables them
to repossess the property if the purchaser fails to make payments.

Repossessed merchandise should be recorded in the repossessed merchandise inventory account

at it fair value. The objective is to put any asset reacquired on the books at its fair value or when
fair value is not ascertainable, at the best possible approximation of fair value.

Example: Assume ABC Company's total installment sales for the year 2014 is $80,000 with a
gross profit rate on installment sales of 30%. In 2015, a customer defaults on a contract for
$1,500 that had originated in the year 2014. A total of $800 had been collected on the contract in
2014 prior to the default. The merchandise sold is repossessed and its fair value to the company
is $360, allowing for reconditioning costs and a normal gross profit on resale. The journal entry
to record the default and repossessions is as follows:

Merchandise- Repossessions .................................... 360

Deferred gross profit- 2014 (700 X 30%)................. 210
Loss on Repossessions (700 - (360 + 210) ................ 130
Installment contract receivable .................. 700

Writing off the installment sales receivable balance of $700 is accompanied by removal of
deferred gross profit of $210 (700 X 30%). The repossessed merchandise is at its fair value of
$360. A loss of $130 is recognized on the repossession, representing the deference between the
installment contract balances canceled $700, the deferred gross profit $210 and the value
assigned to repossessed merchandise $360; [700 - (360 + 210) = 130].

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If the repossessed merchandise in the above example is recorded at the value above the $490, the
deference between the balance in the installment contract receivable account and the deferred
gross profit account will be a gain. However, the conservatism principle suggests no gain would
be recognized at the time of repossession and recognition of the gain should wait the sale of the
repossessed goods.

Illustration: The selected balances of ABC Co. Installment Sales are as follows:

2007 – Jan. 1 2007 – Dec. 31

Installment accounts receivable – 2005 90,000 -
Installment accounts receivable – 2006 285,000 135,000
Installment accounts receivable – 2007 - 337,500
Deferred gross profit – 2005 22,500 18,750
Deferred gross profit – 2006 85,500 85,500
Installment sales - 450,000
Cost of installment sales - 306,000
Repossessed merchandise - 2,000
Installment accounts receivable – 2005 cancelled on - 15,000
Repossession

Required

a. Determine gross profit realized during 2007.

b. Prepare the necessary journal entries including adjusting entries during 2007.

Solution:
a. Determining realized gross profit
Computation of Deferred Gross Profit (DGP) (2007):
Deferred gross profit = Installment sales – Cost of installment sales
Deferred gross profit = 450,000 – 306,000
Deferred gross profit = 144,000
Computation of Deferred Gross Profit Rate (DGP%):
Unrealized gross profit
Deferred gross profit rate ( 2007 )= X 100
Installment Sales
144,000
Deferred gross profit rate ( 2007 )= X 100
450,000
Deferred gross profit rate (2007)= 32%
Unrealized gross profit (Beg)
Deferred gross profit rate ( 2006 )= X 100
Installment A / R( Beg)
85,500
Deferred gross profit rate ( 2006 )= X 100
285,000
Deferred gross profit rate (2006) = 30%

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 Unrealized gross profit (Beg)
Deferred gross profit rate ( 2005 )= X 100
Installment A / R( Beg)

22,500
Deferred gross profit rate ( 2005 )= X 100
90,000
Deferred gross profit rate (2005) = 25%
Computation of Cash Collection in 2007:
Cash Received:
From sale of 2007
Cash collection (2007) = Installment sales – Installment accounts receivable (ending)
Cash collection (2007) = 450,000 – 337,500
Cash collection (2007) = 112,500
From sale of 2006
Cash collection (2006) = Installment A/R (Beg) – Installment A/R (End)
Cash collection (2006) = 285,000 – 135,000
Cash collection (2006) = 150,000
From sale of 2005
Cash collection (2005) = Installment A/R (Beg) – Installment A/R (End) – Installment
A/R
cancelled
Cash collection (2005) = 90,000 – 0 – 15,000
Cash collection (2005) = 75,000
Computation of Realized Gross Profit During 2007:
Realized gross profit = Cash collection X DGP%
Realized gross profit (2007) = 112,500 x 32% = 36,000
Realized gross profit (2006) = 150,000 x 30% = 45,000
Realized gross profit (2005) = 75,000 x 25% = 18,750
Total realized gross profit during 2007 = 99,750
b. Journal entries including adjusting entries during 2007

1. To record installment sales

Installment A/Receivable................. 450,000
Installment sales ..................... 450,000

2. To record cost of goods sold

Cost of Installment sales................. 306,000
Inventories............................. 306,000

3. To record deferred gross profit

Installment Sales .......................................... 450,000
Cost of Installment sales ...................... 306,000
Deferred gross profit ............................ 144,000

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4. To Record cash collections on installment receivables
Cash ................................................................... 337,500
Installment A/Receivable (2005) .................................75,000
Installment A/Receivable (2006) ............................... 150,000
Installment A/Receivable (2007) ............................... 112,500

5. To record realized gross profit on installment sales

Deferred Gross Profit (2005) ................... 18,750
Deferred Gross Profit (2006) .................. 45,000
Deferred Gross Profit (2007) .................. 36,000
Realized Gross Profit ........................ 99,750

6. To close the realized gross profit to income summary

Realized Gross Profit.......................... 99,750
Income Summary ........................ 99,750

Sales under the Cost Recovery Method

Under the cost recovery method, recognition of all gross profit is delayed until cash payments
have been received that equal the entire cost of goods sold. The cost recovery method is the more
conservative method and used when the collection of sales is highly uncertain.

For the cost recovery method, interest income related to any long-term installment sales
increases the unrecognized gross profit until the aggregate customer payments exceed the asset
cost, after which the interest income is recognized.

Consignment Sales Contracts

The sales activity of any business can be organized in different ways. Thus the selling may be
handled directly through own salesmen or indirectly through agents. In case of direct selling, the
company usually has depots all over. The stocks are transferred to these depots and from their
finally sold to ultimate customers. This involves huge expenses and problems of maintaining the
same on a permanent basis. Hence, the firm could appoint agents to whom stocks will be given.
These agents distribute the products to ultimate customers and receive commission from the
manufacturer. One such way of indirect selling is selling through consignment agents. The
relationship between consignor and consignee is that of Principal-Agent relationship.

Consignment takes place where goods are transferred from the owner (consignor) to an agent
(consignee) for the purpose of sale by the consignee on behalf of the consignor. It is important to
understand that the relationship of principal (consignor) and agent (consignee) exists. Because of
this agency relationship, ownership of the goods does not transfer to the consignee.

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The consignee, as the selling agent, is entitles to a commission for selling the goods; expenses
may be incurred by both parties; and periodically or on completion of the consignment,
settlement is effected between the parties. If any goods remain unsold then they are generally
returned to the consignor.

Features of Consignment

The following are the salient features of consignment:

a. Objects: Goods are forwarded by the consignor to the consignee with an objective of sale at a
profit.

b. Ownership: In consignment, the consignee does not buy the goods. He merely undertakes to
sell them on behalf of the consignor. Hence, the ownership in the goods remains with
consignor till it is sold by the consignee.

c. Relationship: The relationship between the consignor and the consignee is that of a principal
and an agent, and not of a debtor and creditor. An agent becomes in debited for amounts
realized on behalf of the principal.

d. Risk: The consignor should bear all the risks connected with the goods until it is sold.

e. Expenses: As consignment is not a sale, whatever the consignee does is on behalf of the
consignor. Thus, the consignor should reimburse all legitimate expenses incurred by the
consignee for selling and receiving the goods.

f. Stock of goods: Any stock remaining unsold with the consignee belongs to the consignor.

g. Commission: The consignee agrees to sell the goods for an agreed rate of commission. He is
therefore, allowed to deduct his commission due from the sale proceeds.

h. Possession: The goods will be in the possession of the consignee until it is sold on behalf of
the consignor.

i. Repossession: The consignor can repossess the goods from the consignee at any time.

j. Profit or loss: Since the consignee acts on behalf of the consignor, the profit or loss on sale
of goods belongs to the consignor.

Distinction between Consignment and Regular Sales

S/N Consignment Regular Sale

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1. Ownership of the goods rests with the The ownership of the goods transfers with
consignor till the time they are sold by the transfer of goods from the seller to the
the consignee, no matter the goods are buyer.
transferred to the consignee.

2. The consignee can return the unsold Goods sold are the property of the buyer and
goods to the consignor. can be returned only if the seller agrees.

3. Consignor bears the loss of goods held It is the buyer who will bear the loss if any,
with the consignee. after the delivery of goods.

4. The relationship between the consignor The relationship between the seller and the
and the consignee is that of a principal buyer is that of a creditor and a debtor.
and agent.

5. Expenses done by the consignee to Expenses incurred by the buyer are to be

receive the goods and to keep it safely is borne by the buyer itself after the delivery of
borne by the consignor. goods.

Accounting for Consignment Business

The consignor and consignee keep their own books of accounts. The consignor may send goods
to many consignees. Also, a consignee may act as agent for many consignors. It is appropriate
that both of them would want to know profit or loss made on each consignment.

Books of the Consignor

The transactions relating to each consignment are recorded in such a way that the profit or loss of
each consignment can be ascertained separately. It requires the preparation of a special account
known as consignment account. A consignment account is a nominal account prepared to find
out the profit or loss of a consignment. The account is debited with the cost of goods sent,
expenses incurred by the consignor and consignee, and the commission due to the consignee. But
the account is credited with the amount of sales affected and also with closing stock, if any. The
balance of this account is either profit or loss.

In addition to the consignment account, the consignor also prepares the personal account of the
consignee to ascertain the amount due by the consignee. This account is debited with the amount
of sales affected by the consignee and credited with the amount of any advance received from
him, expenses incurred by him and commission payable on sales. The balance in this account is
the amount due by the consignee.

Let us see the entries in the books of consignor:

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 Situations Consignor’s Books
On sending goods to the Consignment A/c …………..…... Dr
consignee Goods Sent on Consignment….…… Cr
On expenses for sending goods Consignment A/c …………..…... Dr
(by the consignor) Cash/A/P……………………..…… Cr
On an advance made by the Cash …………………………..… Dr
consignee Consignee‘s A/c …....................….. Cr
On expenses incurred by Consignment A/c …………..…... Dr
consignee Consignee‘s A/c …....................….. Cr

On sales made by the consignee Consignee‘s A/c …................…... Dr

Consignment A/c ………….……... Cr
For consignee‘s commission Consignment A/c …………..…... Dr
Consignee‘s A/c …....................….. Cr
Goods returned by the consignee Goods Sent on Consignment …… Dr
Consignment A/c …………....…... Cr
Remittance of cash by the Cash …………………………..… Dr
consignee in full settlement Consignee‘s A/c …....................….. Cr

The Consignment account in the books of consignor will ultimately show the net profit or loss
on account of consignment business. It must be noted that a separate consignment account must
be opened for different agents. This will enable him to know profit or loss on each consignment.

Books of the Consignee

The only items needed in the consignee’s records will be found from the account sales consignee
sent to the consignor after the goods have been sold. The consignee does not enter the goods
received on consignment. They never belong to the consignee. The consignee’s job is to sell the
goods. It will keep a note of the goods, but not in its accounting records.

Let us see the entries in the books of consignee:

Situations Consignor’s Books

Goods received from the consignor
Expenses incurred by the consignor
Advance made by the consignee
Expenses incurred by consignee
Sales of goods by the consignee
Commission due to the consignee
No entry
No entry
Consignor‘s A/c …….………..… Dr
Cash …......................................….. Cr
Consignor‘s A/c …….………..… Dr
Cash …......................................….. Cr
Cash/Account receivables.....….... Dr
Consignor‘s A/c …………..……... Cr
Consignor‘s A/c …………....…... Dr
Commission revenue …...........….. Cr

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Returns of goods to the consignor No entry
Payment received from debtors Cash …………………………….. Dr
Account receivables …………….. Cr
Remittance of cash to the consignor Consignor‘s A/c ……..………..… Dr
in full settlement Cash …....................................….. Cr

Illustration: On January 1, 2016 ABC Company consigned 50 TV sets at $2,000 each to Mama
Traders for sale on commission at 10% on gross sales. ABC Company paid $500 for packing,
freight and insurance. Mama Traders took delivery of the goods on 11th January, 2016, after
accepting a 15 days bill for $50,000 and paid $1,500 for carriage. They sold 40 TV sets at $2,500
and balance for $2,600 each. Their sales expenses amounted to $2,000. On 31st January, 2016,
Mama Traders forwarded an account sale together with a draft for the balance.

Required: a) Prepare the necessary journal entries and ledger accounts in the books of ABC
Company and Mama Traders
b) Prepare account sales rendered by mama Traders.
Solution:
a) Journal Entries and Ledger Accounts on the Books of ABC Company
(Consignor)
Journal Entries
S/N Description Cr. Dr.
1. Consignment to Mama A/C ………………………………..... 100,000
Goods Sent on Consignment….……………..… 100,000
(Sent goods on consignment to Mama Traders)
2. Consignment to Mama A/C .…………………………….…... 500
Cash ……………………………………..…… 500
(Expenses incurred on the Consignment)
3. Bill receivable A/C …………………………………...……… 50,000
Mama traders A/C ……………………………. 50,000
(Advance received from the Agent in the form of Bill)
4. Consignment to Mama A/C ………………………………..... 3,500
Mama traders A/C ……………………………. 3,500
(Paid carriage and sales expenses by consignee)
5. Cash ……………………………………………………..…… 50,000
Bill receivable A/C …………………………… 50,000
(The bill met on due date)
6. Mama traders A/C ……………………………………………. 126,000
Consignment to Mama A/C ………….……..... 126,000
(Gross sale proceeds as per Account Sales)
7. Consignment to Mama A/C ………………………………..... 12,600
Mama traders A/C ……………………………. 12,600
(Commission on gross sales payable @ 10%)
8. Consignment to Mama A/C ………………………………….. 9,400

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 Profit and Loss A/c …………………………... 9,400
(Transferred profit on consignment to profit and loss A/c)
9. Cash ……………………………………………………..…… 59,900
Mama traders A/C ……………………………. 59,900
(Amount received in draft along with account sales)
10. Goods sent on Consignment A/c …………………………….. 100,000
Trading A/c ………………………………….. 100,000
(Goods sent on consignment A/c closed by transfer to trading
A/c)

Ledgers
Consignment to Mama Account
Dr. Cr.
Goods sent on Consignment A/c …… 100,000 Mama Traders A/c ………… 126,000
Expenses on consignment …………... 500 (Sale proceeds)
Mama Traders A/c:
Carriage ………………….…… 1,500
Sales expenses …………….…. 2,000 3,500
Mama Traders: Commission ……….. 12,600
P & L A/c (Transfer) ………….…,.… 9,400
126,000 126,000

Mama Traders Account

Dr. Cr.
Consignment to Mama A/c ………… 126,000 Bill Receivable A/c ………… 50,000
Consignment to Mama A/c … 3,500
Consignment to Mama A/c … 12,600
Cash ………..………………. 59,900
126,000 126,000

Goods sent on Consignment Account

Dr. Cr.

Trading A/c (Transfer) ……………… 100,000 Consignment to Mama A/c … 100,000

Journal Entries and Ledger Accounts on the Books of Mama Traders (Consignee)
Journal Entries
S/N Description Cr. Dr.

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1. ABC Co. A/C.………………………………….……….…... 3,500
Cash ……………………………………..…… 3,500
(Paid expenses on the Consignment received)
2. ABC Co. A/C ………………………………………...……… 50,000
Bills payable A/C ………….…………………. 50,000
(Acceptance of bill drawn against the consignment)
3. Bills payable A/C ………………………………………..…… 50,000
Cash ………………...………………………… 50,000
(The bill met on due date)
4. Cash …………………………………………………….……. 126,000
ABC Co. A/C ………….……………….…..... 126,000
(Sales effected for the Consignment received)
5. ABC Co. A/C ……………………………..………………..... 12,600
Commission revenue …………………………. 12,600
(Commission receivable on the goods sold)
6. ABC Co. A/C ……….…………………………………..…… 59,900
Cash ……………………………………..……. 59,900
(Amount remitted as final settlement)

Ledgers
ABC Company A/c
Dr. Cr.
Cash (Expenses) …………………….. 3,500 Cash A/c (Sale proceeds) 126,000
Bills payable A/c ……………………. 50,000
Commission A/c …………………….. 12,600
Cash (amount remitted) ……….....….. 59,900
126,000 126,000

Bills payable A/c

Dr. Cr.
Cash ……………………………….… 50,000 ABC Co. A/c ……………….. 50,000

b) Account sales of 50 TV Sets received and sold on behalf of ABC Company

Particulars Amount
Sale Proceeds:
40 TV Sets sold at $2,500 each ………… $100,000
10 TV Sets sold at $2,600 each ………… 26,000 $126,000
Less: Expense:
Carriage …………………………... $1,500
Sales expenses ……………………. 2,000

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 Commission @ 10% ……………... 12,600 (16,100)
Net proceeds …………………………………………. $109,900
Less: Advance (Bill) …………………………………. (50,000)
Balance sent by Draft ………………………………… 59,900

Unsold Stock at Balance Sheet Date

Where all consigned goods are not sold by the end of the consignor‘s financial year, it is
necessary to obtain an ‘account sales’ from the consignee. This is a document detailing
particulars of transactions and the quantity of unsold stock on hand at that date.

Unsold stock is valued to enable the profit on the consignment up to balance sheet date to be
ascertained, and included with revenue from other trading activities. The basis for valuation of
this stock is cost price unless deterioration or obsolescence requires the adoption of net realizable
value. Determination of cost price involves a consideration not only of the original purchase
price of the goods but also of any expenses in transporting the goods to the place of sale-the
consignee‘s store.

Expenses incurred by the consignee in selling the goods such as advertisement, salesman‘s
salaries and commission, storage, insurance against fire or theft are not included in the valuation
of unsold stock. These expenses do not relate to the goods unsold and are recorded as marketing
expenses. In other words it can be said that all direct expense or all expenses made whether by
the consignor or by the consignee in placing the goods in a saleable condition will be taken into
account while valuing the closing stock.

Illustration: Consider the previous illustration and assume that Mama Traders Sold only 30 TV
Sets at $2,500 and 20 TV Sets remain unsold.

Required: a) Prepare the necessary journal entries and ledger accounts in the books of ABC
Company and Mama Traders
b) Prepare account sales rendered by mama Traders.

Solution:
a) Journal Entries and Ledger Accounts on the Books of ABC Company
(Consignor)
Journal Entries
S/N Description Cr. Dr.
1. Consignment to Mama A/C ………………………………..... 100,000
Goods Sent on Consignment….……………..… 100,000
(Sent goods on consignment to Mama Traders)
2. Consignment to Mama A/C .…………………………….…... 500

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 Cash ……………………………………..…… 500
(Expenses incurred on the Consignment)
3. Bill receivable A/C …………………………………...……… 50,000
Mama traders A/C ……………………………. 50,000
(Advance received from the Agent in the form of Bill)
4. Consignment to Mama A/C ………………………………..... 3,500
Mama traders A/C ……………………………. 3,500
(Paid carriage and sales expenses by consignee)
5. Cash ……………………………………………………..…… 50,000
Bill receivable A/C …………………………… 50,000
(The bill met on due date)
6. Mama traders A/C ……………………………………………. 75,000
Consignment to Mama A/C ………….……..... 75,000
(Gross sale proceeds as per Account Sales)
7. Consignment to Mama A/C ………………………………..... 7,500
Mama traders A/C ……………………………. 7,500
(Commission on gross sales payable @ 10%)
Stock on Consignment A/C ………………………………… 40,800
Consignment to Mama A/C ………………….. 40,800
(The amount of unsold goods in stock)
8. Consignment to Mama A/C ………………………………….. 4,300
Profit and Loss A/c …………………………... 4,300
(Transferred profit on consignment to profit and loss A/c)
9. Cash ……………………………………………………..…… 14,000
Mama traders A/C ……………………………. 14,000
(Amount received in draft along with account sales)
10. Goods sent on Consignment A/c …………………………….. 60,000
Trading A/c ………………………………….. 60,000
(Goods sent on consignment A/c closed by transfer to trading A/c)

Ledgers
Consignment to Mama Account
Dr. Cr.
Goods sent on Consignment A/c …… 100,000 Mama Traders A/c ……………… 75,000
Expenses on consignment …………... 500 (Sale proceeds)
Mama Traders A/c: Goods sent on Consignment A/c ...
Carriage ………………….…… 1,500 40,800
Sales expenses …………….…. 2,000 3,500
Mama Traders: Commission ……….. 7,500
4,300

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P & L A/c (Transfer) ………….…,.… 115,800 115,800

Mama Traders Account

Dr. Cr.
Consignment to Mama A/c ………… 75,000 Bill Receivable A/c ………… 50,000
Consignment to Mama A/c … 3,500
Consignment to Mama A/c … 7,500
Cash ………..………………. 14,000

75,000 75,000

Goods sent on Consignment Account

Dr. Cr.
Trading A/c (Transfer) ……………… 60,000 Consignment to Mama A/c … 100,000

Journal Entries and Ledger Accounts on the Books of Mama Traders (Consignee)

Journal Entries

S/N Description Cr. Dr.

1. ABC Co. A/C .………………………………….……….…... 3,500
Cash ……………………………………..…… 3,500
(Paid expenses on the Consignment received)
2. ABC Co. A/C ………………………………………...……… 50,000
Bills payable A/C ………….…………………. 50,000
(Acceptance of bill drawn against the consignment)
3. Bills payable A/C ………………………………………..…… 50,000
Cash ………………...………………………… 50,000
(The bill met on due date)
4. Cash …………………………………………………….……. 75,000
ABC Co. A/C ………….……………….…..... 75,000
(Sales effected for the Consignment received)
5. ABC Co. A/C ……………………………..………………..... 7,500
Commission revenue …………………………. 7,500
(Commission receivable on the goods sold)
6. ABC Co. A/C ……….…………………………………..…… 14,000
Cash ……………………………………..……. 14,000
(Amount remitted as final settlement)

Ledgers

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ABC Company A/c
Dr. Cr.
Cash (Expenses) …………………….. 3,500 Cash A/c (Sale proceeds) 75,000
Bills payable A/c ……………………. 50,000
Commission A/c …………………….. 7,500
Cash (amount remitted) ……….....….. 14,000
75,000 75,000

Bills payable A/c

Dr. Cr.
Cash ……………………………….… 50,000 ABC Co. A/c ……………….. 50,000

b) Account sales of 50 TV Sets received and sold on behalf of ABC Company

Particulars Amount
Sale Proceeds:
30 TV Sets sold at $2,500 each ……………………… $75,000
Less: Expense:
Carriage ………………………..……... $1,500
Sales expenses …………………...……. 2,000
Commission @ 10% …………………... 7,500 11,000
Net proceeds …………………………………………. 64,000
Less: Advance (Bill) …………………………………. 50,000
Balance sent by Draft ………………………………… 14,000

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