MODULE
6 CONSIGNMENT SALES
Week 7
INTRODUCTION
This module demonstrates an understanding about the concept of
consignment arrangement and the principles of PFRS 15 in recognizing revenue
from a consignment arrangement. At the end of this module, learners are expected
to learn and understand that consignment arrangement, an entity (called the
consignor,) delivers goods to another party (called the 'consignee') who
undertakes to sell the goods to end customers on behalf of the consignor. This
module also includes discussion about principal versus agent considerations and
accounting problems related to consignment sales.
Related standard: PFRS 15 Revenue from Contracts with Customers
INTENDED LEARNING OUTCOMES
1. Define a consignment arrangement
2. Apply the principles of PFRS 15 in recognizing revenue from a consignment
arrangement
LEARNING CONTENT
An entity applies PFRS 15 Revenue from Contracts with Customers to
account for revenues from contracts with customers. PFRS 15 supersedes PAS 18
Revenue.
Consignment arrangements
Under a consignment arrangement, an entity (called the consignor,)
delivers goods to another party (called the 'consignee') who undertakes to sell the
goods to end customers on behalf of the consignor. The consignor recognizes
revenue only when the consignee sells the consigned goods to end customers
because it is only at this point that the consignor relinquishes control over the
goods.
ACC 311-Module 6-Consignment Sales 1
Accordingly, the consigned goods remain in the consignor's inventory until they
are sold to end customers. The Consignee records the consigned goods only
through memo entries.
Freight and other incidental costs that the consignor incurs in transferring the
consigned goods to the consignee (e.g., transportation and Insurance) are
capitalized as cost of the consigned goods. Repair cost for damages during
shipment and storage and other maintenance cost are charged as expense. If the
consignee shoulders the freight and other incidental cost, the consignee treats the
costs as receivable from the consignor if the cost are reimbursable; if not, the
consignee recognize them as expense.
In a typical consignment, the consignee is entitled to a commission based on the
consignor's sales price. In other arrangements, the consignee "purchases" the
goods from the consignor simultaneously with the sale to the end customer. In the
latter case, the consignee earns income by making a mark-up on the final selling
price. In some other arrangements, the consignee earns both a commission and a
mark-up.
The commission is recognized as expense by the consignor and as income by the
consignee.
Normally, the consignee deducts its. commission from the amount remitted to the
consignor. In cases where the commission is paid in advance to the consignee, the
consignor records the advance commission as receivable and not cost of inventory.
When the related goods are sold to the end customer, the consignor derecognizes-
the receivable and recognizes commission expense.
When the consigned goods are sold to end customers,
The consignor recognizes revenue at the gross amount of consideration,
i.e., the sale price agreed with the consignee.
The consignee recognizes revenue at the commission or fee to which it is
entitled.
Illustration: Revenue recognition from consignment sales
ABC Co. consigns goods costing P220,000 and with a total sales price of P390,000
to XYZ, Inc. XYZ will be entitled to 20% a commission based on its sales.
ABC Co.- Consignor XYZ, Inc. – Consignee
Memo entry Memo entry
ABC Co. – Consignor XYZ, Inc. – Consignee
No entry Cash 100,000
Commission income
20,000
(100,000 x 20%)
Payable to ABC CO. 80,000
XYZ, Inc. sells consigned goods costing P55,000 for P100,000. ABC Co. is not
notified of the sale.
ACC 311-Module 6-Consignment Sales 2
NO entry is made because ABC Co. was not notified of the sale. In case ABC Co. is notified, ABC would recognize revenue
on this date as follows
Receivable from XYZ 80,000
Commission expense 20,000
Revenue 100,000
In practice, it is uncommon that the consignor is notified of each sale as those sales
occur. More commonly, the consignor receives notice of the consignee's sales on
scheduled dates, such as weekly, monthly or quarterly, depending on the
arrangement.
XYZ, Inc. makes the weekly remittance of sale proceeds, net of commission, to
ABC Co.
ABC Co. – Consignor XYZ, Inc. – Consignee
Cash 80,000 Payable to ABC Co. 80,000
Commission expenses 20,000 Cash 80,000
Revenue
100,000
Cost of goods sold 55,000
Inventory
55,000
Principal versus Agent considerations
PFRS 15 provides the following additional guidance in accounting for consignment
arrangements:
When another party is involved in providing goods or services to a customer,
the entity shall determine whether it is acting as a principal or an agent. The
entity is a principal if it controls the good or service before the good or service is
transferred to the customer. However, the entity is not necessarily a principal if it
obtains legal title of a Product only momentarily before legal title is transferred to
the customer. A principal may personally satisfy a performance obligation or it
may engage another party (for example, a subcontractor) to satisfy some or all of a
performance obligation on its behalf. When the performance obligation is satisfied,
the principal recognizes revenue at the gross amount of consideration. The entity
is an agent if its 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 to which it is entitled.
The following are indicators that an entity is an agent (and therefore does not
control the good or service before it is provided to a customer):
a. Another party is primarily responsible for fulfilling the contract;
ACC 311-Module 6-Consignment Sales 3
b. The entity does not have inventory risk before or after the goods have been
ordered by a customer, during shipping or on return;
c. The entity does not have discretion in establishing prices for the other
party’s goods or services and therefore, the benefits that the entity can
receive from those goods or services is limited;
d. The entity’s consideration is in the form of a commission; and
e. The entity is not exposed to credit risk for the amount receivable from a
customer in exchange for the other party goods or services.
Illustration 1: (Based on IFRS 15.1E231 to IE233)
Chopee Co. operates a website that enables customers to purchase goods
from a trange of suppliers who deliver the goods directly to the costumers.
When a good is purchased via the website, Chopee is entitled to a 10%
commission based on the sales price. Chopee’s website facilities payment
between the supplier and the customer at the price set by the supplier.
Chopee has no further obligation to the customer after arranging a sale.
Analysis:
Chopee is an agent because it does not control the good or service before it is
provided to the customer (i.e., indicators 'a' to ‘e' above are present). Chopee's
performance obligation is to arrange the transfer of goods from the supplier to the
customer. When this performance obligation is satisfied, Chopee recognizes
revenue equal to the agreed commission.
Illustration 2:
X Co. install CCTV (closed circuit television) for customers. X Co. does not
maintain inventory of CCTVs. Instead, when a customer contracts X Co., X Co.
purchases the CCTV from a supplier and install it at the customer’s premises. X
Co. chooses the supplier; however, the CCTV purchased must meet the
customer’s specifications otherwise the costumer can reject it. X Co. negotiates
the contract price with the customer. Therefore, X Co.’s profit is based on the
difference between the contract price and the purchase price of the CCTV less
the labor and other material and overheads relating to the installation. Half of
the contract price is due upon signing the contract and the balance is due after
installation is complete. In case of factory defects, the customer can seek remedy
from the supplier under the supplier’s warranty. However, X Co. is responsible
for any faults relating to the configuration and installation of the CCTV.
Analysis:
X Co. is a principal because it controls the CCTV before it is provided to the
customer. This is evidenced by the following:
a. X Co. is primarily responsible for fulfilling the contract because, although
the CCTV is purchased from a supplier, X co, is ultimately responsible for
ensuring that the CCTV functions in accordance with the customer's
specifications.
ACC 311-Module 6-Consignment Sales 4
b. X Co. has inventory risk because of its responsibility in correcting errors in
specifications.
c. X Co. has discretion in establishing the selling price with the customer.
d. X Co.'s consideration is not in the form of a commission.
e. X Co. has credit risk for the amount receivable from the customer.
When the performance obligation is satisfied, X Co. recognizes revenue at the
gross amount of the contract price negotiated with the customer.
MODULE SUMMARY
A consignor recognizes revenue only when the consigned goods are sold to
end customers. The revenue recognized is the gross amount of the sale
price agreed with the consignee.
Consigned goods are included in the consignor’s inventory.
Freight and other incidental costs of transferring consigned goods to the
consignee form part of the cost of consigned goods.
ACC 311-Module 6-Consignment Sales 5
REFERENCES:
BOOKS:
Millan, Zeus Vernon B. (2020).Accounting for Special Transactions and
Business Combinations , Bandolin Enterprise ,Baguio City.
Ballad,Win Lu,(2019). Partnership and Corporation Accounting ,Domdame
Publication
Sampaloc, Manila, Philippines
Dayag, Antonio J. (2019).Advanced Financial Accounting and Reporting
Part I and II , GIC Enterprise, Claro M. Recto Manila,
Philippines.
De Jesus, Paul Anthony (2019). Advanced Financial Accounting and
Reporting , GIC Enterprise, Claro M. Recto Manila, Philippines.
Guerrero, Pedro (2019). Advanced Financial Accounting and Reporting ,
GIC Enterprise, Claro M. Recto Manila, Philippines.
Philippine Financial Reporting Standards (PFRSs), Philippines: Financial Reporting
Standards Council (FRSC
WEBSITE REFERENCES:
http://www.iasplus.com/
http://www.picpa.com.ph/
ACC 311-Module 6-Consignment Sales 6
Assessment
MODULE ACTIVTY/ASSESSMENT
MULTIPLE CHOICE: THEORY/PROBLEMS
1. Micrium, a computer chip manufacturing company, sells its products to its
distributors for onward sales to the ultimate customers. Due to frequent
fluctuations in the market prices for these goods, Micrium has a “price protection”
clause in the distributor agreement that entitles it to raise additional billings in
case of upward price movement. Another clause in the distributor’s agreement is
that Micrium can at any time reduce its inventory by buying back goods at the cost
at which it sold the goods to the distributor. Distributors pay for the goods within
60 days from the sale of goods to them. When should Micrium recognize revenue
on sale of goods to the distributors?
a. When the goods are sold to the distributors.
b. When the distributors pay to Micrium the cost of the goods (i.e., after 60 days
of the sale of goods to the distributors).
c. When goods are sold to the distributor provided estimated additional revenue
is also booked under the “protection clause” based on past experience.
d. When the distributor sells goods to the ultimate customers and there is no
uncertainty with respect to the “price protection” clause or the buyback of
goods.
2. In accounting for sales on consignment, sales revenue and the related cost of goods
sold should be recognized by the
a. Consignor when the goods are shipped to the consignee.
b. Consignee when the goods are shipped to the third party.
c. Consignor when notification is received that the consignee has sold the goods.
d. Consignee when cash is received from the customer.
3. Aircon, Inc. consigned ten one-horsepower air conditioning units to Argy Trading
and paid ₱2,000 for the freight out. The consignee is allowed a commission of 5%
on sales. Argy Trading submitted an account sales on its transactions for the
period as follows:
Sales (6 units, including 12.5% gross profit) 72,000
Less: Advances to consignor 10,000
Selling expenses 800
Installation and delivery 1,200
Commission 7,200 19,200
Net remittance 52,800
How much was the net profit or loss of Aircon on the consignment?
a. 52,800 profit c. 2,200 profit
b. 7,800 loss d. 1,400 loss
Use the following information for the next two questions:
CR Manufacturing Co. consigned to CE Trading Corp. twelve (12) Sony colored TV sets
which cost ₱9,000 each. Freight out was paid by the consignor in the amount of ₱600.
CE Trading sold eight (8) sets, rendered an account sales, and remitted the amount of
₱82,600 after deducting the following from the selling price of the sets sold:
Commission on selling
price 12%
Selling expenses 1,200
Cost of antennae given free 1,400
Delivery and installation 2,800
4. The total selling price of the eight (8) sets sold by CE Trading Corp. is
a. 100,000 b. 88,000 c. 98,560 d. 78,571.43
5. The net profit of CR Manufacturing Co. on the eight (8) sets sold by CE Trading
Corp. is:
a. 40 b. 9,332.80 c. 10,200 d. 10,600
Use the following information for the next two questions:
Stainless Works Mfg. Co., consigned 5 dozens of stainless chairs to Urban Furniture Co.
on April 1, 20x1. Each chair cost ₱120 and the consignor paid ₱600 for the shipment
to the consignee. On August 15, 20x1, 36 were already sold and the consignee
rendered an account sales, and remitted the balance due the consignor in the amount
of ₱5,580 after deducting the following:
Commission at 15% of the selling price
Selling expenses ₱360
Delivery and installation 180
6. How much is the profit on consignment?
a. 660 b. 900 c. 1,000 d. 1,260
7. The cost of the inventory on consignment in the hands of Urban Furniture Co. is
a. 2,880 b. 3,120 c. 3,480 d. 4,320
Use the following for the next two questions:
On January 1, 20x1, Pete Electrical Shop received from Marion Trading 300 pieces of
bread toasters. Pete was to sell these on consignment at 50% above cost, for a 15%
commission on the selling price. After selling 200 pieces, Pete had the remaining
unsold units repaired for some electrical defects for which he spent ₱2,000. Marion
subsequently increased the selling price of the remaining units to ₱330 per unit. On
January 31, 20x1, Pete remitted ₱64,980 to Marion after deducting the 15%
commission, ₱850 for delivery expenses of sold units, and ₱2,000 for the repair or
100 units.
The consigned goods cost Marion Trading ₱200 per unit, and ₱900 had been paid to
ship them to Pete Electrical Shop. All expenses in connection with the consignment
were reimbursable to the consignee.
8. The consignment profit on the units sold was
a. 12,200 b. 12,880 c. 13,000 d. None of these
9. The value of inventory on consignment was
a. 8,120 b. 8,800 c. 8,920 d. None of these
10. In September 20x1, DEF Co. consigned 3,200 books costing ₱60 and retailing for
₱100 each to GHI Co., debiting Accounts Receivable and crediting Sales for the
retail sales price. Freight cost of ₱3,200 was debited to Freight Expenses by the
consignor. On September 30, 20x1, DEF Co. received from GHI Co. the amount of
₱142,020 in full settlement of the balance due, and Accounts Receivable was
credited for this amount. The consignor deducted a commission of ₱20 for each
book sold, ₱180 for delivery expenses and ₱200 for advertising expense. How
many books were actually sold by GHI, Co.?
a. 1,424 b. 1,780 c. 2,064 d. 3,200
