AFAR 2: Accounting for Special Transactions

Consignment Accounting

CONSIGNMENT ARRANGEMENTS

- Consignment arrangements entail the delivery of goods from one entity to another while maintaining ownership and control.
- Within such arrangements, the consignor refrains from recognizing revenue upon the delivery of products to the consignee, as
ownership remains with the consignor until the goods are sold by the consignee.

WHEN IS REVENUE RECOGNIZED?

1. When the dealer/distributor/consignee sells the products to a customer; or

2. When the dealer/distributor/consignee obtains control of the product

Normally, in consignment sales, the consignor recognizes revenue after receiving notification of the sale and cash remittance from the
consignee.

FEATURES OF CONSIGNMENT ARRANGEMENTS

1. The consigned goods remain the inventory of the consignor.

2. The consignee sells the goods on account and risk of the consignor.
3. Expenses incurred by the consignee on the consigned goods are reimbursed by the consignor.
4. The consignee is expected to take reasonable care of the consigned goods.
5. The consignee is not liable to pay the consignor until the goods are sold to a customer.

Here are the pro-forma journal entries in the books of the consignor and consignee in consignment transactions.

Transactions Books of Consignor Books of Consignee

Dr. Cr. Dr. Cr.
1. Shipment of goods on consignment Inventory on Consignment XX Memorandum entry only
Merchandise Inventory XX

2. Payment of inventoriable expenses by the consignor Inventory on consignment XX No entry

Cash XX

3. Payment of reimbursable expenses by consignee Inventory on consignment XX Consignor Receivable XX

Consignee Payable XX Cash XX

4. Advances by consignor Cash XX Advances to Consignor XX

Advances from Consignee XX Cash XX

5. Sale of merchandise by consignee No entry Cash XX

Consignor Payable XX

6. Notification of sale to consignor and payment of cash due Commission Expenses XX Consignor Payable XX
Consignee Payable XX Cash XX
Cash XX Commission Income XX
Advances from Consignee XX Advances to Consignor XX
Consignment Revenue XX Consignor Receivable XX

SOLUTION GUIDES:

• Amount of remittance to the consignor

Total cash collections from customers XXX

Less:
Commission - actual (XXX)
Reimbursable expenses incurred by the consignee (XXX)
Advances to consignor (XXX)
Net remittance to the consignor P XXX

• Profit or loss on consignment

Consignment Sales P XXX

Less: Sales Discount (XXX)
Sales Returns and Allowances from Customers (XXX)
Net Sales XXX
Less: Cost of Consignment Sales (XXX)
Gross Profit XXX
Less: Commission Expense (accrual basis) (XXX)
Freight/Cartage related to returned goods by the consignee to the consignor (XXX)
Other expenses (XXX)
Net profit or (loss) on consignment P XXX

SAMPLE PROBLEMS (adapted)

Problem 1: Jingka Juice Supplier sends P60,000 (120 sachets of herbal foods) worth of goods on consignment to Lipton Enterprises.
Following are the costs incurred:

• Shipping costs of P600 are paid by Jingka Juice

 • Reimbursable finishing costs of P2,400 is paid by Lipton
• Lipton advances P3,360 to Jingka.
• At year-end, one-half of the goods on consignment are sold for P48,000 cash.
• A 10% commission on sales is earned by Lipton according to the terms of the consignment.

Requirements:

a. Prepare journal entries in the books of the consignor and consignee.

b. Determine the amount of remittance by the consignee.

Problem 2: On June 1, SMART Company shipped twenty-five DVD to EASY View Store on consignment. The DVD is to be sold at
an advertised price of P200 per item. The cost of each DVD to the consignor is P100. The consignor paid P75 to ship the merchandise.
Commission is to be 25% of sales price. During the month, two DVD were returned.

On June 30, EASY View Store remitted the amount due to consignor after deducting commission of P400.

Questions:

1. Amount of remittance
2. Consignment Profit
3. Cost of Inventory on consignment

Problem 3: On May 15, 2024, AA Sales Company received a shipment of merchandise with a selling price of P15,000 from PC
Company. The consigned goods cost PC Company P10,000 and freight charges of P120 had been paid to ship the goods to AA Sales
Company.

The consignment arrangement provided for a sale of merchandise on credit with terms of 2/10, n/30. The 15% commission is to be based
on the accounts receivable collected by the consignee. Cash discounts taken by customers, expenses applicable to goods on consignment
and any cash advanced to the consignor are deductible from the remittance by the consignee.

AA Sales Company advanced P6,000 to PC Company upon receipt of the shipment. An expense of P800 was paid by AA. By June 2024,
70% of the shipment had been sold, and 80% of the resulting accounts receivable had been collected, all within the discount period.
Remittance of the amount due was made on June 30, 2024.

Determine the following:

a. Profit on consignment
b. Cash remittance by AA Sales Company
c. Cost of unsold units in the hands of AA

Problem 4: Lover Company delivered ten albums to Enchanted Company on consignment. These albums cost P3,000 each and are to
be sold at P5,000 each. Lover Company paid shipment cost of P2,500.

Enchanted Company submitted an account sales report stating that it had returned one album and was remitting P21,900. This amount
represents the total amount due to Lover Company after deducting the following from the selling price of the album sold:

Commission 20% of the selling price

Advertising P1,000
Delivery and Installation 600
Cartage on consigned goods 500

Requirements: Compute for the following:

1. Number of albums sold
2. Consignment profit
3. Cost of Inventory in the hands of Enchanted Company

Problem 5: Information relating to regular sales and consignment sales of DEPTALS Inc. for the year ended June 30, 2024 follows:

Regular Sales Consignment Sales Total

SALES P120,000 P30,000 P150,000
COST OF SALES 84,000 26,000 110,000
OPEX ? 1,760 16,910

You ascertain that merchandise costing P6,500 is in the possession of consignees and included in the cost of consigned merchandise
sold. Operating expenses of P15,150 (more than half of which are fixed) are to be allocated to regular sales and to consignment sales on
the basis of sales amount. The P1,760 operating expenses relating to consignment sales include a commission of 5% and P260 costs
incurred by consignees relating to the entire shipment of merchandise worth P26,000.

Compute the (a) net income on regular sales and (b) net income on consignment sales.