SAINT COLUMBAN COLLEGE

College of Business Education

Pagadian City

HANDOUT ASI 2402

CONSIGNMENT ACCOUNTING
Under PFRS 15, when an entity delivers a product to another party for sale to end customers, the
entity shall evaluate whether that other party has obtained control of the product at that point in time.
A product that has been delivered to another party may be held in a consignment arrangement if that
other party has not obtained control of the product. Accordingly, an entity shall not recognize revenue
upon delivery of a product to another party if the delivered product is held on consignment.

A consignment sale is one in which physical inventory is transferred to another party, but the party is
not required to pay the entity. In this arrangement, the consignor retains the title of the inventory upon
transfer to the other party until it is sold to the customer. The consignee earns commission on the
product that it has sold to the customer and periodically remits the cash collected to the consignor, net
of commission and other reimbursable expenses.

CHARACTERISTICS OF CONSIGNMENT
1. Shipment of goods to the consignee is not treated as a sale.
2. Title of the goods remains with the consignor, and the recognition of the sale is deferred
until goods are transferred to a third party.
3. Revenue is recognized only after the consignor receives the notification of sale and the
cash remittance from the consignee.
4. The merchandise is carried throughout the consignment as the inventory of the consignor,
separately classified as Merchandise Inventory on Consignment.
5. Involves a common “Principal – Agent” relationship.

ADVANTAGES OF CONSIGNMENT
1. Wider Markets for the Product – Dealer may not be willing to assume the risk of purchasing
certain goods, such as new product or an item that may become obsolete, but may be willing
to carry them on consignment.
2. Control over Selling Price – The consignor can control the selling price of the goods because
ownership remains to him.
3. Recovery of an Asset – The consignor has the right to possession of all unsold goods or the
right to payment for goods sold if the consignee declares bankruptcy.
4. Avoid the risk of ownership – Goods that do not sell or that become obsolete, deteriorate,
or decline in market value may be returned to the consignor.
5. Requires less capital – The consignee does not incur liability and does not make cash
payment on the goods until they are sold. Thus, the consignee’s capital investment will be
lower if the goods are held on consignment.

TWO PARTIES INVOLVED

1. Consignor
▪ Ships merchandise to the consignee with the intention to make a profit or develop a
market.
▪ Carries the merchandise as inventory throughout the period of consignment separately
classified as consignment inventory.
▪ Periodically receives from the consignee a report called ACCOUNT SALES that shows
the merchandise as an asset on its books as received, sold, expenses chargeable to
the consignment, and the cash remitted.

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ASSURANCE AND AUDITING: SPECIALIZED INDUSTRIES HANDOUT 2402
MYLENE P. ALFANTA, CPA
 ▪ Revenue shall be recognized by the consignor, after receiving notification of the sale
and cash remittance from the consignee

2. Consignee
▪ Acts as an agent for the consignor in selling the merchandise, accepts the
merchandise and agrees to exercise due diligence in caring for and selling it.
▪ Remits to the consignor cash received from customers, after deducting a sales
commission and any chargeable expenses.
▪ Does not record the merchandise as an asset on its books.
▪ Upon sale, consignee has a liability for the net amount due to the consignor

RIGHTS OF THE CONSIGNEE

1. Compensation – This refers to commission income which is computed as percentage of the
total sales of the consigned goods.
2. Reimbursement for Advances and Necessary Expenses – Consignee has the right to be
reimbursed by the consignor for any advances from sale of consigned goods and any directly
related expenses such as freight an insurance. If the collections are insufficient, the consignee
has a direct claim against the consignor.
3. Granting of Credit – The consignee has the right to sell goods on credit and to extend normal
credit terms but must be exercise with prudence.

ACCOUNTING FOR CONSIGNMENT – BOOKS OF CONSIGNOR

1. No revenue is recognized until a sale is made by the consignee.
2. Any consignment expenses paid by the consignor that are necessary in bringing the goods to
their saleable condition and present location are added to the inventory balance as capitalized
costs of inventory on consignment.
3. Any consignment expenses paid by the consignee that are necessary in bringing the goods to
their saleable condition and present location are added to the inventory balance as capitalized
costs of inventory on consignment.

Inventory on Consignment
Beginning Balance Cost of Sold Consigned Goods
Cost of Goods Shipped on Consignment Cost of Goods Returned by Consignee
Capitalized Cost paid by Consignor
Capitalized Cost paid by Consignee
Ending Balance

ACOUNTING FOR CONSIGNMENT – BOOKS OF CONSIGNEE

Accounting procedures established by the consignee must recognize that goods received on
consignment ae not owned. However, the consignee must:
1. Maintain records and controls that permit the identification of:
▪ Goods Held on Consignment
▪ Related receivables and reimbursable expenses.
2. Prepare periodic reports. The consignor normally creates a special account called “Consignor
Receivable” and “Consignor Payable”.
3. Prepare an Account Sales to be given to the consignor.

TREATMENT OF COSTS AND EXPENSES

1. Costs to be Allocated between Sold and Unsold units:
▪ Freight cost paid by the consignor upon shipment.
▪ Freight and cartages paid by the consignee upon receipt of shipment.
▪ Insurance freight on consigned goods.

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MYLENE P. ALFANTA, CPA
 ▪ Packaging costs of the consigned goods.
▪ Costs and fees, such as repairs and installation related to consigned goods.

2. Costs to be Chargeable to Sold Units only:

▪ Commissions
▪ Delivery and Installation
▪ Advertising
▪ Reconditioning on delivered units to customers.
▪ Insurance freight for transit to customers
▪ Expenses related to returned units delivered.

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ASSURANCE AND AUDITING: SPECIALIZED INDUSTRIES HANDOUT 2402
MYLENE P. ALFANTA, CPA
 COMPREHENSIVE PROBLEM

Closet Scout Corporation is a company that sells branded swimwear. The company decided to
sell their products through consignment to beach and island owners. On February 1, 2023, Closet
Scout made an agreement to be the consignor of swimwear in Misty Island. Closet Scout also
agreed to reimburse the delivery costs from Misty Island to the customer together with other
inventoriable and selling costs. The following are the transactions between Closet Scout and Misty
Island for the month of February.

Feb. 3 Closet Scout shipped 50 pieces of swimwear to Misty Island costing P1,500
each.
Feb. 3 Closet Scout paid P4,500 for the shipment of goods to Misty Island.

Feb. 5 Misty Island paid additional cartage for the goods for an amount of P5,200.

Feb. 7 Misty Island paid P3,000 for the promotion of the swimwear.

Feb. 10 Closet Scout asked for an advance of P13,200 from Misty Island even
though no sale is made yet.

Feb. 12 Misty Island returned 10 swimwear to Closet Scout due to defect.

Feb. 15 18 swimwear had been sold for cash with a selling price of P2,500 each.

Feb. 22 2 swimwear had been sold on account for P2,800. Collection is already 75%
of the selling price.

Feb. 22 Misty Island paid P500 for delivery of goods to customer.

Feb. 28 Misty Island earned 15% commission as agreed and remitted to Closet
Scout all the cash collections after reimbursement.

Closet Scout has the following information to its sale related to swimwear in the main office:
a. Sold 120 swimwear with selling price of P2,400.
b. Maintenance Expense of P25,000.
c. Salaries Expense to General Managers of P30,000.
d. Advertising Expense of P15,000.

Requirements:
1. Prepare journal entries on the books of consignor and books of consignee.
2. Prepare an Account Sales.
3. Compute for the cost of unsold and sold inventory on consignment.
4. Prepare an income statement of the consignor.

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ASSURANCE AND AUDITING: SPECIALIZED INDUSTRIES HANDOUT 2402
MYLENE P. ALFANTA, CPA
 MULTIPLE CHOICE PROBLEMS

PROBLEM 1: On August 1, 2023, JBD Incorporated consigned 10 lady’s handbags to Mags Store
costing P3,000 each, paying freight charge of P3,000. At the end of the month, Mags Store reported
sales of 6 handbags at P6,000 each and expenses incurred of P2,500, and remitted the net proceeds
to JBD after deducting a 20% commission.

1. How much net income did JBD realize in August on the consignment?
a. P7,500 net income
b. P6,500 net income
c. P6,700 net loss
d. P6,500 net loss

2. What is the total cost of inventory of unsold handbags?

a. P12,000
b. P13,200
c. P14,200
d. P15,000

PROBLEM 2: TECKY Company consigned five computer equipment, with cost of P8,000 each, to the
Xavier Company which was to sell these goods for the account and risk of the former for a commission
of 15% of selling price. The Tecky Company paid trucking costs of P2,000 on the shipment.
Correspondingly, Xavier Company paid P3,200 on the freight of the shipment. On the last day of the
year, Xavier reported that it sold three computers, two for cash at P15,000 each and one on credit at
P18,000 of which 25% was collected as down payment. Xavier Company remitted all the cash due.

1. The amount remitted by Xavier Company is:

a. P13,500
b. P24,100
c. P34,500
d. P37,600

2. The consignment net income or loss is:

a. P10,400
b. P11,600
c. P12,400
d. P13,680

3. The amount of inventory on consignment of Tecky Company is:

a. P16,000
b. P17,200
c. P18,080
d. P27,120

PROBLEM 3: The CC Manufacturing Company delivered ten DVD players to CLTV Company on
consignment. These DVD players cost P3,000 each and are to be sold at P5,000 each. The CC
Manufacturing Company paid shipment cost of P2,500. CLTV Company submitted an account sale
stating that it has returned one unit and was remitting P21,900. This amount represents the total
amount due to CC Manufacturing Company after deducting the following from the selling price of the
DVD player sold:

Commission 20% of Selling Price

Advertising P1,000
Delivery and Installation P600

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MYLENE P. ALFANTA, CPA
 Cartage on Consigned Goods P500

1. The number of units sold by CLTV Company is:

a. 4
b. 5
c. 6
d. None of the Above

2. The net income or loss on consignment realized by CC Manufacturing Company is:

a. P2,300
b. P2,480
c. (P2,550)
d. None of the Above

3. The cost of inventory in the hands of CLTV Company is:

a. P10,080
b. P10,150
c. P10,200
d. None of the Above

PROBLEM 4: Ji Pyeong shipped 100 units of its inventories to Do San on consignment. Each unit
costs P450 and has a standard retail price of P750. The 100 units had a freight-in charge of P3,750.
After a month, Do San returned 10 units of inventory and remitted P32,850 cash to Ji Pyeong together
with an account sale with the following items included:
▪ Commission of 20%
▪ Cartage on consigned goods, P750
▪ Marketing and promotional expenses, P1,500
▪ Delivery to customer and installation, P900

1. How many units were sold by Do San?

a. 0 units
b. 40 units
c. 60 units
d. 100 units

2. How much is the cost of inventory still out on consignment at the end of the month?
a. P9,900
b. P14,850
c. P15,300
d. P0

3. How much is the total consignment profit or (loss) recognized by Ji Pyeong?

a. (P3,825)
b. (P3,450)
c. P3,450
d. P3,720

PROBLEM 5: Cheese Corporation consigned 10,000 products to Milk Convenience Store costing P72
each and can be sold for P120. The consignment agreement provides that Milk Convenience Store is
entitled to a 15% commission on the sales, but is required make an advance equivalent to 60% of the
cost of the goods. The advance made is to be recovered through reduction from the monthly
remittance, the amount of which is proportionate to the number of goods sold. At the end of the month,
the account sales showed the following information:

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MYLENE P. ALFANTA, CPA
 ▪ Commission charges, P27,000
▪ Freight-out, P18,000
▪ Advertising costs, P9,000

1. How much was the total remittance made by Milk Convenience Store for the month?
a. P61,200
b. P64,800
c. P126,000
d. P180,000

2. How much is the total consignment profit or (loss) recognized by Cheese Corporation?
a. (P18,000)
b. P18,000
c. P25,000
d. P41,000

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ASSURANCE AND AUDITING: SPECIALIZED INDUSTRIES HANDOUT 2402
MYLENE P. ALFANTA, CPA