ACCOUNTING 511 - CONSIGNMENT

A. CONSIGNMENT

- Is the transfer of merchandise from the owner to another party who becomes the agent of the
owner to sell the goods. The owner is the consignor and the agent is the consignee. The consignee
sells the goods based on the agreement with the consignor, submits a periodic report usually
called the Account Sales and remits whatever amount is due the consignor after deducting
commission, cash advance and reimbursable expenses.

B. NATURE OF CONSIGNMENT

a) Physical transfer of goods by their owner (consignor) to another party (consignee).

b) Legal title to the goods retained by the owner until their sale.

c) Consignee having possession of the goods for the purpose of sale as specified in the
agreement.

d) Consignor holds the consignee accountable for the goods until sold.

e) When the goods are sold, the consignor recognizes transfer of title and recognizes revenue
from the sale.

f) The consignee cannot regard the goods as his own property, nor is there any liability to the
consignor than accountability for consigned goods.

g) The relationship between consignor and consignee is one of principal and agent, not of
buyer and seller.

C. ADVANTAGES ON CONSIGNORS VIEWPOINT

a) Wider marketing area.

b) Serves as a market survey especially in new territories.

c) Retail price of the goods can be controlled.

d) Lesser risk of not being paid by consignee, as collection only made upon sale of the goods by
the consignee

D. ADVANTAGES ON CONSIGNEES VIEWPOINT

a) Minimal working capital requirement - no additional or bigger investment needed.

b) Risk of loss from unsold or spoiled goods is avoided as this is own and carried by consignor.

E. RIGHTS OF CONSIGNEE

a) Right to be reimbursed for advances of expenses.

1
 b) Right to receive compensation either from commission or the difference between the price
fixed by the consignor and the price assigned by the consignee.

c) Right to make the usual warranties to the goods with which the consignor would be bound.

d) Right to extend credit if this is customary of the business of the consignor, unless restrained.

F. DUTIES OF THE CONSIGNEE

a) To preserve the consigned goods with the diligence of a good father of a family.

b) To keep the consignors property and receivable separate from his own.

c) To exercise prudence in granting credit as well as diligence in collection.

d) To render accounting of the goods.

e) He cannot, without express will of the consignor, to sell credit, otherwise consignee will be
held liable.

G. FUNDAMENTAL ACCOUNTING PROBLEMS WITH REGARDS TO CONSIGNMENT

CONSIGNORS PART:

o CALCULATION OF CONSIGNMENT PROFIT

SALE OF CONSIGNED GOODS XXX

LESS: COST OF CONSIGNED GOODS SOLD (XX)

CONSIGNORS EXPENSES (XX)

CONSIGNEES EXPENSES (XX) (XX)

CONSIGNMENT PROFIT XXX

o DETERMINATION OF COST OF INVENTORY

COST OF UNSOLD CONSIGNED GOODS XXX

ADD: FREIGHT/CARTAGE/DRAYAGE OF UNSOLD GOODS XXX

COST OF CONSIGNED GOODS INVENTORY XXX

NOTE: THE CONSIGNOR USES THE ACCOUNT TITLE CONSIGNMENT OUT. The consignment out is
somewhat similar to Revenue and Expense account. The T-account of Consignment Out may
look like this:

2
 Consignment Out

Cost of merchandise shipment Sales of consigned goods

Consignors expenses Unsold consigned goods

Consignees expenses

If total credit exceed the total debit, you will have consignment profit or use the formula
above.

CONSIGNEES PART:

o DETERMINATION OF ACCOUNTANBILITY OR NET REMITTANCE TO THE CONSIGNOR

SALE OF CONSIGNED GOODS XXX

LESS: ADVANCES FROM CONSIGNEE (XX)

CONSIGNEES EXPENSES (XX)

CONSIGNEES COMMISSION (XX) (XX)

NET REMITTANCE TO THE CONSIGNOR XXX

NOTE: THE CONSIGNEE USES THE ACCOUNT TITLE CONSIGMENT IN. A debit balance indicates
receivable on the consignee from the consignor. If a credit balance, a net accountability of
consignee or consignor is to be shown as liability on the consignors statement of financial
position. The T-account of Consignment In may look like this:

Consignment In

Cash advances to consignor Sales of consigned goods

Consignees expenses

Consignees commission

Remittance to consignor

H. METHODS OF ACCOUNTING FOR CONSIGNMENT

3
 A. Consignor

i. Income kept separate

ii. Income not kept separate

B. Consignee

i. Sales kept separate

ii. Sales not kept separate

I. SAMPLE JOURNAL ENTRIES WHEN INCOME KEPT SEPARATE

Transaction Consignees Books Consignors Books

Shipment of 10 transistors on Memorandum entry Consignment Out 2,000

consignment, cost is P200 each Consignment Shipment 2,000

Consignor paid freight to ship No entry Consignment Out 600

goods to consignee P600 Consignment Freight 600

Expenses of consignee Consignment In 125 No entry

chargeable to consignor: Cash 125
Cartage P125
Sales, 10 at P400 each Cash 4,000 No entry
Consignment In 4,000

20% commission on sales and Consignment In 800 Cash 3,075

remittance by the consignee Commission Income 800 Consignment Cost 925
Consignment Out 4,000
Consignment In 3,075
Cash 3,075 Consignment Out 475
Consignment Profit 475

J.

PROBLEMS

A. The Consignment Out account on the books of Pentagon Corporation appears below:

Consignment Out

Debit Credit

Sept 15 - Shipment of 10 watches 10,000 Sept 17 - Advances from Consignee 5,000

4
 Freight Out 1,000 Sept 30 - Sales, 4 watches 17,000

Sept 30 - Consignees Charges

Cartage 750

Commission 3,400
Advertising 2,000 6,150

Q1. How much is the amount remitted by the consignee to Pentagon?

Q2. How much is the consignee profit?

B. Below is the account sales submitted by Alfred Wee to Diamond Corporation, consignor:

Sales: 7 tubeless ceiling lamps 28,000

On hand: 3 units

Charges: Cartage on consigned goods 700

Advertising 300

Installation (7 units @ P70) 490

Commission 2,800 4,290

Net remittance per enclosed check 23,710

Additional information:

a. The goods cost the consignor P2,500 each.

b. The consignor paid for the freight of the consigned goods, P1,200.

Q3. How much is the consignment income?

Q4. What is Diamonds cost of inventory out on consignment?

C. On September 23, 2016, Erickson Corporation ships 15 TV sets each costing P2,000 to Dino Paul on
consignment basis. The consignee undertakes to sell the sets at P3,500, for a commission of 15% on
sales price plus reimbursement of all expenses related to the consignment. Erickson pays for the
packing and shipping cost of P600. On September 30, the consignee remits the amount due to the
consignor informing the consignor in his account sales that he sold 9 TV sets. His charges include the
following: Installation cost P540; Advertising P180.

Q5. How much is the net amount due to consignor?

Q6. How much is the consignment profit assuming that the consignee returned 3 TV sets and paid
P300 for freight on return?

5
D. The Aristocrat Sales Company ships electric shavers to Prince Russel on consignment. The cost of the
shavers to the consignor is P108. Sales are to be made at an advertised price of P240. The consignee
is allowed a commission of 25% of sales plus allowance for advertising not to exceed P100. The
following transactions take place on September:

o 100 shavers were shipped to Prince. Aristocrat paid shipment charges of goods sent to
consignee P50.

o Prince sold 80 shavers during the month at the advertised price. Prince made remittance at
the end of the month for the balance owed to date.

Q7. How much cash would Prince remit?

Q8. Using the same data above, but assuming that five units were returned and the consignee paid
P50 for freight on return, what would be the cost of ending inventory out on consignment?

E. Big Ben Company delivered ten wall clocks to International Watch and Jewelry Store on consignment.
These wall clocks cost P2,500 each and are to be sold at a gross margin of 60% on cost. Big Ben paid
shipment cost of P2,500. International Watch submitted an Account sales stating that it had returned
one unit was remitting P21,900. This amount represents the net amount due to Big Ben after
deducting the following from the selling price of the wall clocks sold:

Commission 25% of selling price

Advertising 1,000

Delivery and installation 600

Cartage on consigned goods 500

Q9. How many units were sold by International Watch?

Q10. What is the cost of inventory in the hands of International Watch?

F. Roland Corporation consigned 10 radios to Rutchie Acebo. Cost per unit was P500 while selling price
is P800. Ruthie is entitled to commission of 10% on sales. Roland Corporation paid for freight cost of
P150 while the consignee paid for cartage of P70 and advertising expense of P80. Seven radios were
sold while one was returned to consignor for being defective. Freight on return was P30.

Q11. How much is the consignment profit?

Q12. How much is the cost of inventory out on consignment?

Q13. How much is net remittance?