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Unit VII – Consignment Sales

CONSIGNMENT ARRANGEMENTS
PFRS 15 – Revenue Contracts with Customers

CONSIGNMENT SALES

 an arrangement whereby en entity, the consignor, delivers goods to another party, the
consignee, who undertakes to sell the goods to customers on behalf of the consignor.

 the consigned goods are owned and included in the inventory of the consignor. The consignee
records the consigned goods through memorandum entries.

 the freight cost, insurance and other incidental costs of transferring the goods to the consignee
are added to the cost of consigned goods.

 repair costs for damages during shipment , storage and other maintenance costs are charged to
expense.

 if the consignee paid for the freight and other costs in bringing the consigned goods to the place of
the consignee, if the costs are reimbursable – treated as receivable from consignor, but if not
reimbursable – recorded as expense of the consignee.

 the consignee is entitled to commission based on sales, or in other arrangement, when the
consignee purchases the consigned goods simultaneously with the sale with the customer, then
the consignee’s commission is the mark up on the final selling price.

 the revenue is recognize by the consignor only when the consignee sells the consigned goods to
the customers. At this point the control of the asset is transferred to the customer.

 the commission earned and reimbursable expenses are deducted by the consignee from the
amount to be remitted to the consignor.

 in cases where the commission is given to the consignee in advance, the consignor records the
advance given as receivable and when the goods are sold to the customer then the receivable is
eliminated and commission expense is recognize.

Illustrative Problem 1:

1. On January 2, 2020 Trampo Company consigned 8 equipment to ARC Equipment Company.

Each cost P 20,000 and has a suggested selling price of P 30,000. Tramp paid P 4,000 for
transferring the equipment to the consignee’s place of business.

2. On January 25, 2020, ARC sold 5 units of consigned goods. The consignor is not notified of the
sale.

3. On January 31, 2020 ARC remitted the collections on sales for the period, after deducting the
following:

Commission( based on the sales net of commission) 20%

Delivery and testing of units sold P 2,000

Required:

1. How much profit is earned by the consignor from the sale? P 20,500
2. How much was the net remittance to the consignor? P 123,000
3. How much is the cost of unsold merchandise? P 61,500
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To compute for cost of unsold goods and profit earned by consignor:

Consigned goods
Total ( 8 units) Sold ( 5 units) Unsold (3units)
Cost ( 20,000/ unit) 160,000 100,000 60,000
Freight cost 4,000 2,500 1,500
Commission (150,000/120% x 20%) 25,000 25,000
Delivery and testing 2,000 2,000 ______
Total costs 191,000 129,500 61,500
Selling Price 150,000
Net profit - Consignor 20,500

To compute for cash remittance:

Total Sales P 150,000
Less: commission 25,000
Delivery and testing 2,000 27,000
Remittance to consignor 123,000

Journal entries in the consignor’s and consignee’s books:

Consignor’s Books Consignee’s Books

2020 2020
Jan. 2 – consigned 8 equipment to Jan. 2 - Received 8 equipment
ARC Equipment Co. with from Trampo Co. on
a cost of P 20,000 each. consignment with a cost of P 20,000 Each.

25 - Inventory 4,000 25 - Cash 148,000

Cash 4,000 Commission income 25,000
Freight cost of Payable to consignor 123,000
Consigned merchandise

31 Cash 123,000 31 Payable to consignor 123,000

Commission expense 25,000 Cash 123,000
Delivery and testing expense 2,000
Sales 150,000
5 units sold

31 Cost of sales 102,500

Inventory 102,500
Cost of goods sold.

Note: Most commonly, the consignor is not notified of the sale and the consignor received the notice of
consignees’ sales together with remittance on scheduled dates.
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PFRS 15 provides the following additional guidelines which relevant to consignment

arrangements:

PRINCIPAL vs AGENT CONSIDERATIONS

Principal
 it controls the goods or services before the goods or services is transferred to the customer.
 not a principal if the entity obtains the legal title to the goods only momentarily before legal title is
the transferred to the customer
 may personally satisfy a performance or may engage another party(subcontractor) to satisfy
some or all the performance obligation
on its behalf.
 when the performance obligation is satisfied , the principal recognized revenue at the gross
amount of consideration.

AGENT
 if the performance obligation is to arrange the provision of goods or services by another party.
 when the performance obligation is satisfied, the agent recognizes revenue at the commission or
fee.
 the following are indicators that the entity is an agent:
1. another party is primarily responsible for fulfilling the contract;
2. the party does not have inventory risk before or after goods have been ordered by the
customer, during shipping or on return;
3. 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 the goods or services is limited;
4. the entity’s consideration is in the form of commission; and
5. the entity is not exposed to credit risk for the amount receivable from customer in exchange
for the other party’s goods or
services.

Illustration 1 ( source: Accounting for Special Transactions by Zeus Vernon B. Millan)

ABC Co. operates a website that enables customers to purchase goods from range of suppliers who
deliver the goods directly to the customers. When the goods is purchased via the website, ABC Co. is
entitled to a10% commission based on the sales price. ABC Co.’s website facilitates payment between
the supplier and the customer at prices that are set by the supplier. ABC Co. requires non-refundable
payment from customers before sales orders are processed. ABC Co. has not further obligation to the
customer after arranging a sale.

Analysis: 1. ABC Co. is an agent because it does not control the goods before it is provided to the
customers.

2. ABC Co.’s performance obligation is to arrange for the provision of the goods by the
Supplier. When the performance obligation is satisfied, ABC Co. recognizes revenue –
Commission.
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Illustration 2 ( source: Accounting for Special Transactions by Zeus Vernon B. Millan)

ABC Co. agrees to purchase a specific number of tickets from major airlines at a reduced prices and
resells them at a higher price. ABC Co. must pay the 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 there is no credit risk.

ABC Co. also assist 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 dissatisfaction with the service.

Analysis:

ABC Co. is a principal because it controls the ticket before they are resold to the customer

This is evidenced by the following:

1. ABC Co. is primarily responsible for fulfilling the contract, which is providing the right to fly.
2. ABC Co. has inventory risk because the tickets are purchased before they are sold to customers
and ABC Co is exposed to loss resulting from failure to resell the tickets for more than their cost.
3. ABC Co. has the discretion in establishing the selling price of the tickets with the customers.
4. ABC Co.’s consideration is not in the form of commission, but it depends on the sales price it sets
and the cost of the tickets purchased from the airline. ABC recognizes revenue at the gross
amount of the tickets resold to the customers.
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Unit VII – Consignment Sales

Name: ______________________
Block _______________________

Assignment : Answer as directed.

Problem 1:

PIERS Corporation consigns 20 water heaters to SEASIDE Company on January 5, 2020. The unit cost
per water heater is P 10,000. Piers pays P 3,000 in transporting the water heaters to Seaside Company.
At the month end, Seaside Company remits P 232,000 for the sale of 16 water heaters, after deducting
the following:

20% commission based on selling price

Freight out P 16,000
Installation costs 8,000

Required:
1. Compute the profit recognized by Piers Corporation on the consignment arrangements.
2. Compute the total cost of unsold water heaters.
3. Prepare journal entries in the consignor’s books
4. Prepare journal entries in the consignee’s books

Problem 2:

ABC Company consigned 12 refrigerators to XYZ, Inc. the refrigerators cost P 12,000 each and the
consignor paid P 3,600 for freight out. The consignee subsequently rendered account sales for five units
sold at P 16,500 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) P 500

Q1: How much the net profit of the consignor on the five refrigerators sold? __________________

Q2: How much was the net remittance of the consignee on the five refrigerators sold? ______________

Q3: What is the total amount of inventory should ABC report for the consigned goods? _____________

Problem 3:

On October 20, 2020, Sunny Company consigned 20 freezers to Windy Company costing P 14,000
each for sale at P 20,000 each and paid P 8,000 in transportation costs. On December 31, 2020, Windy
reported the sale of 10 freezers and remitted P 170,000. The remittance was net of the agreed 15%
commission.

What amount should Sunny recognize as consignment sales revenue for 2020? _________ ___

End